UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] For the quarterly period ended October 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415)368-1501
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
The number of shares of Common Stock, par value $.01 per share, outstanding
on December 17, 1998 was 10,771,557.
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PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
<S> <C> <C>
Part I 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998 (unaudited) 3-4
and July 31, 1998
Consolidated Statements of Operations for the three months ended
October 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the three months ended
October 31, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-19
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-25
Part II 1. Legal Proceedings 26
2. Changes in Securities 26
3. Defaults Upon Senior Securities 26
4. Submission of Matters to a Vote of Security Holders 26
5. Other Information 26
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26-28
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2
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PART I
ITEM 1.
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, July 31,
1998 1998
------------ ----------
(Unaudited)
<S> <C> <C>
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,723 $ 157,513
Trade accounts receivable, less allowance for doubtful accounts of $418,796 and $418,796. 2,030,664 1,195,653
Inventories (note D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,366 377,097
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . 128,267 95,775
------------ ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,585,020 1,826,038
Property, plant and equipment - net (note C) . . . . . . . . . . . . . . . . . . . . . . . 4,084,056 4,119,437
Lease rights (net of accumulated amortization of $490,009 and $478,560). . . . . . . . . . 664,030 675,479
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,883 77,026
------------ ----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,405,989 $6,697,980
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31,
1998 July 31,
(Unaudited) 1998
--------------- ---------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note F) . . . . . . . . . . . . . $ 1,753,897 $ 1,693,897
Revolving line of credit (note H) . . . . . . . . . . . . . . . . . . . 1,351,378 991,823
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 2,389,463 2,050,575
Borrowings from IBC-Brownsville . . . . . . . . . . . . . . . . . . . . 672,552 672,552
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,706,098 1,555,261
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 7,873,388 6,964,108
Long-term debt, less current maturities (note F) . . . . . . . . . . . . - 60,000
Commitments and contingencies (note H) . . . . . . . . . . . . . . . . . - -
Stockholders' Equity (note G)
Senior Preferred stock-$.01 par value, 5,000,000 shares authorized; 0 . - -
shares issued and outstanding at October 31, 1998 and July 31, 1998
Preferred stock-$.01 par value, 5,000,000 shares authorized; 0. . . . . - -
convertible shares issued and outstanding at October 31, 1998 and July
31, 1998
Common stock-$.01 par value, 25,000,000 shares authorized;. . . . . . . 99,527 99,527
9,952,673 shares issued and outstanding at October 31, 1998 and July
31, 1998
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 13,318,592 13,318,592
Notes receivable from the president of the Company and a related party. ( 2,763,006) ( 2,763,006)
for exercise of warrants, less reserve of $223,000 at October 31, 1998
and July 31, 1998
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,122,512) ( 10,981,241)
--------------- ---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . ( 467,399) ( 326,128)
--------------- ---------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . $ 7,405,989 $ 6,697,980
=============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
4
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------
October 31, October 31,
1998 1997
------------- -------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 6,502,087 $ 8,188,002
Cost of goods sold . . . . . . . . . . . . . . . . . 5,884,469 7,758,459
------------- -------------
Gross profit. . . . . . . . . . . . . . . . . . . . 617,618 429,543
------------- -------------
Selling, general and administrative expenses
Legal and professional fees . . . . . . . . . . . . 203,082 152,784
Salaries and payroll related expenses . . . . . . . 301,007 207,034
Travel. . . . . . . . . . . . . . . . . . . . . . . 36,365 82,406
Other . . . . . . . . . . . . . . . . . . . . . . . 121,585 108,138
------------- -------------
662,039 550,362
------------- -------------
Operating (loss). . . . . . . . . . . . . . . . . . ( 44,421) ( 120,819)
Other income (expense)
Interest expense. . . . . . . . . . . . . . . . . . ( 97,268) ( 61,137)
Interest income . . . . . . . . . . . . . . . . . . 418 57,508
------------- -------------
Net (loss) before taxes . . . . . . . . . . . . . ( 141,271) ( 124,448)
Provision for income taxes . . . . . . . . . . . . . - -
------------- -------------
Net (loss). . . . . . . . . . . . . . . . . . . . $ ( 141,271) $ ( 124,448)
------------- -------------
(Loss) per common share and (loss) per common share. $ ( 0.01) $ ( 0.01)
============= =============
assuming dilution (note B)
Weighted average common shares outstanding . . . . . 9,952,673 8,529,789
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------
October 31, October 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 141,271) $ ( 124,448)
Adjustments to reconcile net (loss) to net cash used in (provided by) operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 65,806 70,727
Amortization of lease rights. . . . . . . . . . . . . . . . . . . . . . . . . . 11,449 11,449
Interest income from related party notes receivables. . . . . . . . . . . . . . - ( 57,504)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,156) -
Changes in current assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 835,012) ( 268,548)
Related party receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 91,342
Costs and estimated earnings in excess on uncompleted contracts . . . . . . . . - ( 551,322)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 25,269) ( 232,537)
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . ( 28,347) ( 189,167)
Deferred registration costs . . . . . . . . . . . . . . . . . . . . . . . . . . - ( 370,000)
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,888 415,062
Billings in excess of costs and estimated earnings of billings on uncompleted . - ( 7,596)
contracts
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,835 225,795
------------- -------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . ( 466,077) ( 986,747)
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 27,268) ( 211,054)
------------- -------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . ( 27,268) ( 211,054)
Cash flows from financing activities:
Revolving credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . 359,555 ( 140,000)
Issuance of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,500,000
Issuance of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,131,250
Reduction in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - ( 923,395)
------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . 359,555 1,567,855
------------- -------------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . ( 133,790) 370,054
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 157,513 31,142
------------- -------------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,723 $ 401,196
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,750 $ 47,329
============= =============
Supplemental disclosures of noncash transactions:
Common stock and warrants issued. . . . . . . . . . . . . . . . . . . . . . . . $ - $ 263,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
6
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly International Energy Development
Corporation (IEDC) and The Russian Fund, a Delaware corporation, was
incorporated on August 27, 1992. On October 21, 1993, IEDC acquired Penn
Octane Corporation, a Texas corporation, whose primary asset was a liquid
petroleum gas (LPG) pipeline lease agreement (Pipeline Lease) with Seadrift
Pipeline Corporation (Seadrift), a subsidiary of Union Carbide Corporation
(Union Carbide). On January 6, 1995, the Board of Directors approved the
change of IEDC's name to Penn Octane Corporation. The Company is engaged
primarily in the business of purchasing, transporting and selling LPG and
has provided services and equipment to the compressed natural gas ( CNG)
industry. Substantially all of the LPG sales volume since inception has
been to PMI Trading Limited (PMI), a subsidiary of Petroleos Mexicanos
(PEMEX), the Mexican state owned oil company.
In February 1997, the Company formed Wilson Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary, for the purpose of
engaging in the business of designing, constructing, installing and
servicing equipment for CNG fueling stations and related products for use
in the CNG industry throughout the world. The subsidiary's name was changed
to PennWilson CNG, Inc. (PennWilson) in August 1997.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary. In February 1998, the
Company formed PennWill, S.A. de C.V., Camiones Ecologicos, S.A. de C.V.,
Grupo Ecologico Industrial, S.A. de C.V., Estacion Ambiental, S.A. de C.V.,
Estacion Ambiental II, S.A. de C.V., and Serinc, S.A. de C.V. (collectively
Estacion), all Mexican corporations. To date there has not been significant
operations for any of these entities.
BASIS OF PRESENTATION
-----------------------
The accompanying financial statements include the Company and its
subsidiaries, PennWilson and Holdings (Company). All significant
intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of October 31, 1998, the
unaudited consolidated statements of operations, and the unaudited
consolidated statements of cash flows for the three months ended October
31, 1998 and 1997 have been prepared by 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 unaudited consolidated financial position of the Company as of
October 31, 1998 and the unaudited consolidated results of operations and
unaudited consolidated cash flows for the three months ended October 31,
1998 and 1997.
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 Annual Report on Form 10-K for the year ended July 31, 1998.
Certain reclassifications have been made to prior period balances to
conform to the current presentation. All reclassifications have been
applied consistently to the periods presented.
7
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - (LOSS) PER COMMON SHARE
(Loss) per share of common stock is computed on the weighted average number
of shares outstanding. During periods in which the Company incurred losses,
giving effect to common stock equivalents is not presented as it would be
antidilutive.
The FASB issued Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share", which supersedes Accounting Principles Board
Opinion No. 15 (APB 15), "Earnings Per Share". The statement became
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Early adoption was not permitted.
The following table presents reconciliations from (loss) per common share
to (loss) per common share assuming dilution (see note G for the warrants
and convertible preferred stock excluded because they are anti-dilutive):
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<CAPTION>
For the three months ended October 31, 1998 For the three months ended October 31, 1997
------------------------------------------- -------------------------------------------
(Loss) Shares Per-Share (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) . . . . . . . . . . . . . . . . . $( 141,271) - - $( 124,448) - -
Less: Dividends on preferred stock. . . . . - - - - - -
BASIC EPS. . . . . . . . . . . . . . . . . . ( 141,271) 9,952,673 $ ( 0.01) ( 124,448) 8,529,789 $ ( 0.01)
=========== ===========
Net (loss) available to common stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . . . . . . . - - - - - -
Convertible Preferred Stock. . . . . . . . . - - - - - -
DILUTED EPS. . . . . . . . . . . . . . . . . $( 141,271) 9,952,673 $ ( 0.01) $( 124,448) 8,529,789 $ ( 0.01)
============ ============= =========== ============ ============= ===========
Net (loss) available to common stockholders
</TABLE>
8
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31, July 31,
1998 1998
-------------- --------------
LPG:
Building. . . . . . . . . . . . . $ 173,500 $ 173,500
LPG terminal. . . . . . . . . . . 3,426,440 3,426,440
Automobile and equipment. . . . . 388,837 391,138
Office equipment. . . . . . . . . 35,738 35,738
Capital construction in progress. 117,586 75,389
Leasehold improvements. . . . . . 291,409 291,409
CNG:
Furniture, fixtures and equipment 189,206 203,559
Automobiles . . . . . . . . . . . 3,500 3,500
Capital construction in progress. 1,043,158 1,041,434
Leasehold improvements. . . . . . 8,575 8,575
-------------- --------------
5,677,949 5,650,682
Less: accumulated depreciation and
amortization. . . . . . . . . . . ( 1,593,893) ( 1,531,245)
-------------- --------------
$ 4,084,056 $ 4,119,437
============== ==============
NOTE D - INVENTORIES
Inventories consist of the following:
October 31, July 31,
1998 1998
-------------- --------------
LPG:
Pipeline . . $ 297,047 $ 276,938
LPG terminal 105,319 100,159
-------------- --------------
$ 402,366 $ 377,097
============== ==============
9
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - NYDOT CNG FUELING STATION
During the year ended July 31, 1998, the Company recorded additional
revenues of approximately $821,994 related to change-orders for additional
work performed by the Company in connection with the construction of
equipment for a CNG fueling station for the New York City Department of
Transportation (NYDOT). The change-orders have been submitted to the
customer for approval. During March 1998, the Company was requested to
furnish additional documentation with respect to the submitted
change-orders which was subsequently provided on May 15, 1998. On April 30,
1998, the Company received notification from the general contractor, A.E.
Schmidt Environment ("AES"), that the Company was in default under the
agreement between AES and the Company relating to the NYDOT CNG fueling
station. The Company has responded to AES indicating that AES is in default
with the terms of the agreement and that the Company is awaiting
satisfactory resolution of these matters prior to completion of the
remaining work outlined under the agreement. The Company is currently
exploring legal remedies available. As of July 31, 1998, the Company
revised its estimate related to the work preformed in connection with the
change-orders. As a result of this revision the Company reduced revenues
associated with the change-orders by $500,000 and recorded an allowance for
doubtful accounts of $321,994. In connection with this contract, the
Company does not anticipate a material amount of additional costs
associated with either completion of the contract or subsequent warranties
provided for in the contract.
For the three months ended October 31, 1997, the Company had recorded
additional revenues of approximately $600,000 related to change-orders in
connection with the NYDOT CNG fueling station.
10
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - LONG-TERM DEBT
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<CAPTION>
Long-term debt consists of the following:
October 31, July 31,
1998 1998
------------ ----------
<S> <C> <C>
Contract for Bill of Sale; due in semi-annual payments of $22,469, including interest
at 11.8%; due in October 1998; collateralized by a building. . . . . . . . . . . . . . . $ 91,197 $ 91,197
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate due June 5, 2002 (see note L). . 100,000 100,000
1,500,000 in promissory notes, with warrants to purchase up to 250,000 shares of
common stock at an exercise price of $6.00 per share expiring October 21, 2000 and
warrants to purchase up to 337,500 shares of common stock at an exercise price of
1.75 per share expiring November 30, 2001; principal due June 30, 1999, or from
proceeds received by the Company from any public offering of debt or equity of the
Company in excess of $2,250,000. Promissory notes are secured by an assignment
of net proceeds received by the Company in connection with the Judgment; interest
at 10.0% on the principal amount of the promissory notes is due quarterly on March
31, June 30, September 30 and December 31. The effective interest rate after
consideration of the discount, is 18.0% per annum. Purchasers of the promissory
notes were granted one demand registration right with respect to the shares issuable
upon exercise of the warrants (see note L) . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,500,000
Note issued in connection with settlement of vendor obligation. Principal due in
monthly installments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,700 62,700
------------ ----------
1,753,897 1,753,897
Current maturities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,753,897 1,693,897
------------ ----------
$ - $ 60,000
============ ==========
</TABLE>
11
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - STOCKHOLDERS' EQUITY
PREFERRED STOCK
----------------
On September 18, 1993, in a private placement, the Company issued 150,000
shares of its $.01 par value, 11% convertible, cumulative non-voting
preferred stock at a purchase price of $10.00 per share. On June 10, 1994
the Company declared a 2-for-1 stock split. The preferred stock was
convertible into voting shares of common stock of the Company at a
conversion ratio of one share of preferred stock for 3.333 shares of common
stock. On September 10, 1997, the Board of Directors of the Company
approved the issuance of an additional 100,000 shares of common stock as an
inducement for the preferred stockholders to convert the shares of
preferred stock and release all rights with respect to the preferred stock.
In January 1998, all 270,000 shares of the preferred stock were converted
into an aggregate of 999,910 shares of common stock of the Company. The
issuance of the additional 100,000 common shares was recorded as a
preferred stock dividend in the amount of $225,000 at January 30, 1998.
STOCK AWARD PLAN
------------------
Under the Company's 1997 Stock Award Plan, the Company has reserved for
issuance 150,000 shares of Common Stock, of which 129,686 shares were
unissued as of October 31, 1998, to compensate consultants who have
rendered significant services to the Company. The Plan is administered by
the Compensation Committee of the Board of Directors of the Company which
has complete authority to select participants, determine the awards of
Common Stock to be granted and the times such awards will be granted,
interpret and construe the 1997 Stock Award Plan for purposes of its
administration and make determinations relating to the 1997 Stock Award
Plan, subject to its provisions, which are in the best interests of the
Company and its stockholders. Only consultants who have rendered
significant advisory services to the Company are eligible to be
participants under the Plan. Other eligibility criteria may be established
by the Compensation Committee as administrator of the Plan.
In October 1997, the Company issued 20,314 shares of Common Stock to a
Mexican consultant in payment for services rendered to the Company valued
at $113,000 pursuant to the plan.
12
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
LITIGATION
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against the International Bank of
Commerce-Brownsville ("IBC-Brownsville"), a Texas state banking
association, seeking (i) either enforcement of a credit facility between
the Company and IBC-Brownsville or a release of the Company's property
granted as collateral thereunder consisting of significantly all of the
Company's business and assets; (ii) declaratory relief with respect to the
credit facility; and (iii) an award for damages and attorneys' fees. After
completion of an arbitration proceeding, on February 28, 1996, the 197th
District Court in and for Cameron County, Texas entered judgment (the
"Judgment") confirming the arbitral award for $3,246,754 to the Company by
IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the
Texas Court of Appeals on January 21, 1997. The Company responded on
February 14, 1997. On September 18, 1997, the appeal was heard by the Texas
Court of Appeals and on June 18, 1998, the Texas Court of Appeals issued
its opinion in the case, ruling essentially in favor of the Company.
IBC-Brownsville sought a rehearing of the case on August 3, 1998. The Court
has not ruled on the IBC-Brownsville request for rehearing. A decision is
expected by December 31, 1998. As of October 31, 1998, the net amount of
the award is approximately $3.5 million, which is comprised of (i) the
original judgment, including attorneys' fees, (ii) post-award interest,
(iii) cancellation of the note and accrued interest payable to
IBC-Brownsville which is included in the Consolidated Financial Statements,
less attorneys' fees.
On April 18, 1996, the Company reached an agreement (the "IBC Settlement
Agreement") to accept $400,000 to settle a lawsuit it filed in October 1995
against International Bank of Commerce-San Antonio, a bank related to
IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement,
the parties, including IBC-Brownsville and IBC-San Antonio, executed mutual
releases from future claims related to the IBC-Brownsville litigation.
Additionally, IBC-San Antonio agreed to indemnify the Company for any such
claims made or asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company (Case
No. 96-06-3502) in the 357th Judicial District Court of Cameron County
alleging that the Company, in filing the Judgment against IBC-Brownsville
in order to clear title to its assets, slandered the name of
IBC-Brownsville. IBC-Brownsville contends that the Judgment against it
prevented it from selling certain property. IBC-Brownsville has claimed
actual damages of $600,000 and requested punitive damages of $2,400,000. On
September 23, 1996, the court 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.
On July 30, 1996, the Company filed suit in the District Court of Harris
County, Texas against Jorge V. Duran, former Chairman of the Board of the
Company, regarding alleged conversion and fraud by Mr. Duran during his
time as an employee of the Company. The Company has not yet quantified its
damages and is seeking a declaration that the termination of employment of
Mr. Duran was lawful and within the rights of the Company based on Mr.
Duran's status as an at-will employee of the Company. On December 12, 1996,
Mr. Duran filed a counterclaim in the District Court of Harris County,
Texas asserting the following claims: breach of contract against the
Company and Mr. Richter; wrongful discharge against the Company, Mr.
Richter, and Mr. Mark Casaday, a former officer and director of the
Company; defamation against the Company, Mr. Richter, Mr. Mark Casaday, and
Mr. Jorge Bracamontes; and interference with contract against Mr. Jorge
Bracamontes. On February 27, 1997, the two actions were consolidated into
Case No. 96-37447, Penn Octane Corporation v. Jorge V. Duran in the 164th
District Court of Harris County, Texas and on September 30, 1998, Mr. Duran
filed a Fourth Amended Original Petition. Mr. Duran is seeking judgment
against the Company and Messrs. Richter, Casaday and Bracamontes for
damages in excess of $12.0 million, including prejudgment interest as
provided
13
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
for by law, and attorneys' fees and such further relief to which he may be
justly entitled. The Company intends to vigorously defend against Mr.
Duran's counterclaim.
On October 14, 1998, a complaint was filed by Amwest Surety Insurance
Company ("Amwest") naming as defendants, among others, PennWilson and the
Company seeking reimbursement for payments made by Amwest from the
performance and payment bonds in response to claims for services provided
by suppliers, laborers and other materials and work to complete the NYDOT
contract. The Company is currently considering its legal options and
intends to file an answer to Amwest's complaint.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should
not materially affect its consolidated financial position.
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
In connection with the PMI Sales Agreement, invoicing occurs weekly. From
November 1996 to early November 1997, the Company and PMI made an
arrangement under which PMI provided financing on the Company's behalf
under the terms of the Company's supply agreement with Exxon, the Company's
main supplier. As a result of this arrangement, invoicing occurred on a
monthly, rather than a weekly basis.
On October 22, 1997, the Company entered into a $6,000,000 credit facility
with RZB Finance L.L.C. (RZB) for demand loans and standby letters of
credit (RZB Credit Facility) to finance the Company's purchase of LPG and
propylene (PPL). Under the RZB Credit Facility, the Company pays a fee with
respect to each letter of credit thereunder in an amount equal to the
greater of (i) $500, (ii) 1.5% of the maximum face amount of such letter of
credit, or (iii) such higher amount as may be agreed between the Company
and RZB. Any amounts outstanding under the RZB Credit Facility shall accrue
interest at a rate equal to the rate announced by the Chase Manhattan Bank
as its prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB has
sole and absolute discretion to terminate the RZB Credit Facility and to
make any loan or issue any letter of credit thereunder. RZB also has the
right to demand payment of any and all amounts outstanding under the RZB
Credit Facility at any time. In connection with the RZB Credit Facility,
the Company granted a mortgage, security interest and assignment in any and
all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the
lease with the Brownsville Navigation District of Cameron County for the
land on which the Company's Brownsville Terminal Facility is located, the
Pipeline Lease, and in connection therewith entered into leasehold deeds of
trust, security agreements, financing statements and assignments of rent.
Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any
nature on any of its properties or assets, except in favor of RZB, without
the consent of RZB. The Company's President, Chairman and Chief Executive
Officer has personally guaranteed all of the Company's payment obligations
with respect to the RZB Credit Facility. Upon establishment of the RZB
Credit Facility, beginning November 11, 1997, PMI no longer provided any
financing on behalf of the Company, and the Company began invoicing PMI on
a weekly basis.
Effective April 22, 1998, the aggregate amount available under the RZB
Credit Facility was increased to $7,000,000.
In connection with the Company's purchases of LPG from Exxon and/or PG&E
NGL Marketing, L.P., the Company issues letters of credit on a monthly
basis based on anticipated purchases.
14
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
As of October 31, 1998, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG totaled $6,000,000 of which
$1,204,502 was being used to secure unpaid purchases from Exxon as of
October 31, 1998. In addition, as of October 31, 1998, the Company had
$1,351,378 of loans outstanding under the RZB Credit Facility. In
connection with these purchases, as of October 31, 1998, the Company had
unpaid invoices due from PMI totaling $1,828,631 and cash balances
maintained in the RZB Credit Facility collateral account of $779.
During June 1998, a letter of credit was established under the RZB Credit
Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG totaling
$360,000. The letter of credit expired in August 1998.
During November 1998, a letter of credit was established under the RZB
Credit Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG
totaling $176,000.
NOTE I - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has incurred losses since
inception, has used cash in operations, has a deficit in working capital
and stockholders' equity and is delinquent under certain loan and lease
agreements. In addition, the Company is involved in litigation, the outcome
of which cannot be determined at the present time. As discussed in note A,
the Company has historically depended heavily on sales to one major
customer.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts as shown in the
accompanying consolidated balance sheet is dependent upon the collection of
the Judgment, the Company's ability to obtain additional financing and to
raise additional equity capital, and the success of the Company's future
operations. The financial statements do not include any adjustments related
to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to 1) collect the Judgment, 2)
increase sales to its current customers, 3) increase its customer base, 4)
extend the terms and capacity of the Pipeline Lease and the Brownsville
Terminal Facility, 5) expand its product lines and 6) raise additional debt
and/or equity capital.
At July 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,826,000. The ability to
utilize such net operating loss carryforwards may be significantly limited
by the application of the "change of ownership" rules under Section 382 of
the Internal Revenue Code.
15
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement (Agreement) with its major
customer, PMI, to provide a minimum monthly volume of LPG to PMI through
September 30, 1999. During October 1998, the Company was purchasing LPG on
a month-to-month basis from Exxon Company, U.S.A. (Exxon), its major
supplier, to meet the minimum monthly volumes required in the Agreement.
Effective November 1, 1998, the Company entered into a supply contract with
Exxon to purchase minimum monthly volumes of LPG through September 1999
under payment terms similar to those required in the Agreement. The supply
price is below the sales price provided for in the Agreement.
CNG BUSINESS
The Company has not entered into any CNG contracts subsequent to July 31,
1998.
NOTE K - SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131 (SFAS
No. 131), "Disclosure about Segments of an Enterprise and Related
Information", effective for years beginning after December 15, 1997, with
earlier application encouraged. The Company adopted SFAS 131 in 1997.
The Company has the following reportable segments: LPG and CNG. The LPG
segment is a distributor of fuel and the CNG segment designed, constructed
and installed fueling stations since its inception through early 1998.
Subsequently, the CNG segment focused primarily on the construction and
operation of a CNG vehicle and fueling station infrastructure in Mexico
City, Mexico.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. Segment
profit (loss) is based on profit (loss) from operations before income tax.
The reportable segments are distinct business units operating in similar
industries. They are separately managed, with separate marketing and
distribution systems. The following information about the segments is for
the three months ended October 31, 1998 and 1997.
16
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - SEGMENT INFORMATION - Continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, 1998:
LPG CNG Totals
------------ ------------ --------------
<S> <C> <C> <C>
Revenues from external customers. . . . . . . $ 6,478,566 $ 23,521 $ 6,502,087
Interest expense. . . . . . . . . . . . . . . 92,393 4,875 97,268
Interest Income . . . . . . . . . . . . . . . 418 - 418
Depreciation and amortization . . . . . . . . 56,896 8,910 65,806
Segment profit (loss) . . . . . . . . . . . . ( 59,850) ( 81,421) ( 141,271)
Segment assets. . . . . . . . . . . . . . . . 6,877,866 528,123 7,405,989
Segment liabilities . . . . . . . . . . . . . (7,186,295) ( 687,093) ( 7,873,388)
Expenditure for segment assets. . . . . . . . 62,229 ( 34,961) 27,268
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 6,502,087
Other revenues -
Elimination of intersegment revenues -
------------
Total consolidated revenues $ 6,502,087
============
Profit (Loss)
Total profit (loss) for reportable segments $( 141,271)
Other profit (loss) -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
------------
Consolidated (loss) before income tax $( 141,271)
============
Assets
Total assets for reportable segments $ 7,405,989
Other assets -
Corporate headquarters -
Other unallocated amounts -
------------
Total consolidated assets $ 7,405,989
============
Geographic Information. . . . . . . . . . . . Revenues Assets
- --------------------------------------------- ------------ ------------
United States . . . . . . . . . . . . . . . . $ 6,502,087 $ 7,405,989
Canada. . . . . . . . . . . . . . . . . . . . - -
------------ ------------
$ 6,502,087 $ 7,405,989
============ ============
</TABLE>
17
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - SEGMENT INFORMATION - Continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, 1997:
LPG CNG TOTALS
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues from external customers . . . . . . . $ 6,542,481 $ 1,645,521 $ 8,188,002
Interest expense . . . . . . . . . . . . . . . 59,099 2,038 61,137
Depreciation and amortization. . . . . . . . . 55,871 11,856 67,727
Segment (loss) . . . . . . . . . . . . . . . . ( 44,975) ( 79,473) ( 124,448)
Segment assets . . . . . . . . . . . . . . . . 5,714,416 1,801,118 7,515,534
Segment liabilities. . . . . . . . . . . . . . ( 4,431,981) ( 1,118,645) ( 5,560,626)
Expenditure for segment assets . . . . . . . . 20,542 190,512 211,054
Reconciliation to Consolidated Amounts
- ----------------------------------------------
Revenues
Total revenues for reportable segments $ 8,188,002
Other revenues -
Elimination of intersegment revenues -
--------------
Total consolidated revenues $ 8,188,002
==============
Profit or Loss
Total profit or loss for reportable segments $ ( 124,448)
Other profit or loss -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
--------------
Consolidated income before income taxes $ ( 124,448)
==============
Assets
Total assets for reportable segments $ 7,515,534
Other assets -
Corporate headquarters -
Other unallocated amounts -
--------------
Total consolidated assets $ 7,515,534
==============
Geographic Information . . . . . . . . . . . . Revenues Assets
- ---------------------------------------------- -------------- --------------
United States. . . . . . . . . . . . . . . . . $ 8,153,149 $ 7,515,534
--------------
Canada . . . . . . . . . . . . . . . . . . . . 34,853 -
-------------- --------------
$ 8,188,002 $ 7,515,534
============== ==============
</TABLE>
18
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - SUBSEQUENT EVENTS
COMMON STOCK
-------------
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 75,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 12,
2000 for an amount of $250,000. Net proceeds from the sale were used for
working capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common stock of
the Company and warrants to purchase 300,000 shares of common stock with an
exercise price of $1.75 per warrant and an expiration date of December 13,
2003 for an amount of $500,000. Net proceeds from the sale will be used for
working capital purposes.
PROMISSORY NOTE AMENDMENT
---------------------------
On October 21, 1997, the Company completed a private placement pursuant to
which it issued promissory notes in the aggregate principal amount of $1.5
million and warrants to purchase 250,000 shares of common stock exercisable
until October 21, 2000 at an exercise price of $6.00 per share. The notes
were unsecured. Proceeds raised from the private placement totaled $1.5
million, which the Company used for working capital requirements. Interest
at 10% per annum was due quarterly on March 31, June 30, September 30 and
December 31. Payment of the principal and accrued interest on the
promissory notes was due on June 30, 1998. On December 1, 1998, the Company
completed a rollover and assignment agreement effectively extending the due
date of the promissory notes until June 30, 1999 (the "Rollover
Agreement"). In connection with the Rollover Agreement, the Company agreed
to assign its rights to any net cash collected from the Judgment towards
any unpaid principal and interest owing on the promissory notes. The
Company also agreed to use any net proceeds received by the Company from
any public offering of debt or equity of the Company in excess of
$2,250,000, towards the repayment of any balances owing under the
promissory notes. The promissory note holders also received additional
warrants to purchase 337,500 shares of common stock, exercisable until
November 30, 2001, at an exercise price of $1.75 per share. The purchasers
in the private placement were granted one demand registration right with
respect to the shares issuable upon exercise of the warrants.
LPG SUPPLY CONTRACT
---------------------
Effective November 1, 1998, the Company entered into a supply contract with
a major supplier to purchase minimum monthly volumes of LPG through
September 1999 under payment terms similar to those required in the
Agreement (Note J). The supply price is below the sales price provided for
in the Agreement.
SEADRIFT PROMISSORY NOTE
--------------------------
During November 1998, the Company issued a promissory note to Seadrift for
$261,206, representing all outstanding rental obligations owed to Seadrift
through November 1998. The promissory note is payable in six installments
beginning November 25, 1998 and ending February 3, 1999. Interest on the
promissory note is 10% per annum.
NOTE CANCELLATION
------------------
During December 1998, the Company issued 53,884 shares of common stock of
the Company to Zimmerman Holdings Inc. (ZHI), as payment for and full
cancellation of a note payable of $100,000 and related interest and other
obligations totaling $18,000 and the cancellation of any further obligation
to pay any future royalties in connection with Company's purchase of
certain CNG assets from Wilson Technologies Inc., a wholly owned subsidiary
of ZHI.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1999) refer to the Company's fiscal year ended July 31. The
results of operations of PennWilson, which began operations in March 1997 have
been included in the Company's results of operations for fiscal 1999 and 1998
discussed below. To date, there has been no significant activity associated
with the operations of Holdings or Estacion.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, since 1997, the provision of equipment and services to the
CNG industry. Beginning July 1994, the Company has bought and sold LPG for
distribution into northeast Mexico and the U.S. Rio Grande Valley.
Historically, the Company has derived substantially all of its revenues
from sales to PMI, its primary customer, of LPG purchased from Exxon. In fiscal
1998, the Company derived approximately 95% of its revenues from sales of LPG,
of which sales to PMI accounted for nearly 100% of total LPG sales.
As part of its business strategy, in March 1997 the Company acquired
certain assets and hired certain former employees from WTI, a company engaged in
the engineering, design and construction of equipment for turnkey CNG fueling
stations. In connection with this acquisition, the Company paid $394,000 and
was committed to pay up to $2.0 million in royalty payments based on future
sales, if any. The acquisition was accounted for as a purchase and has been
reflected as such in the Company's consolidated financial statements beginning
in fiscal 1997.
The Company's CNG revenues were previously derived from contracts awarded
on a fixed-price, as-completed basis. Currently, the Company is no longer
actively pursuing contracts to construct CNG equipment for sale to third
parties. Due to the current financial condition of the Company and the
additional capital required to pursue CNG operations in Mexico, the Company is
currently reassessing its CNG business strategy including the possible
disposition of some or all of the Company's CNG assets. As of the date of this
Report, the Board has not definitively determined whether to continue or dispose
of the Company's CNG business.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
variable posted prices that provide the Company with a fixed margin. Costs
included in costs of goods sold other than the purchase price of LPG may affect
actual profits from sales, including costs relating to transportation, storage,
leases, maintenance and financing. The Company generally attempts to purchase
in volumes commensurate with projected sales. However, mismatches in volumes and
prices of LPG purchased from Exxon and resold to PMI could result in
unanticipated costs.
20
<PAGE>
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price of LPG for the three months ended October 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
October 31, October 31,
1998 1997
------------ ------------
<S> <C> <C>
Volume Sold
LPG (millions of gallons) 22.4 15.1
Average sales price
LPG (per gallon). . . . . $ 0.28 $ 0.43
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998, COMPARED THE THREE MONTHS ENDED
OCTOBER 31, 1997
Revenues. Revenues for the three months ended October 31, 1998 were $6.5
million compared with $8.2 million for the three months ended October 31, 1997,
a decrease of $1.7 million or 20.7%. Of this decrease (i) $1.6 million was
attributable to revenues from sales of equipment for CNG fueling stations due to
the Company's decision to reassess its CNG business strategy resulting in $0
revenues from CNG related contracts during the three months ended October 31,
1998 and (ii) $124,282 related to the Company's LPG business; $2.2 million was
attributable to a decrease in average sales price for LPG during the three
months ended October 31, 1998, partially offset by increased volumes of LPG sold
during the three months ended October 31, 1998, resulting in an increase in
sales of $2.1 million.
Cost of sales. Cost of sales for the three months ended October 31, 1998
was $5.9 million compared with $7.8 million for the three months ended October
31, 1997, a decrease of $1.9 million or 24.4%. Of this decrease (i) $1.5
million was attributable to costs associated with sales of equipment for CNG
fueling stations as described above and (ii) $411,306 of costs associated with
the Company's LPG business ($2.2 million was attributable to a decrease in
average purchase price for LPG purchased during the three months ended October
31, 1998, offset by the increase in volume of LPG sold during the three months
ended October 31, 1998, resulting in an increase in cost of goods sold of $1.8
million).
Selling, general and administrative expenses. Selling, general and
administrative expenses were $662,039 for the three months ended October 31,
1998 compared with $550,362 for the three months ended October 31, 1997, an
increase of $111,677 or 20.3%. This increase was primarily attributable to
payroll and other related costs in connection with the Company's LPG business,
partially offset by reductions in costs associated with the operations of the
CNG business for the three months ended October 31, 1998.
Other income and expenses, net. Other income (expense), net was ($96,850)
for the three months ended October 31, 1998 compared with ($3,629) for the three
months ended October 31, 1997. The increase in other income (expense), net,
during the three months ended October 31, 1998 was due primarily to interest
income on a note from the president of the Company and a related party which
during fiscal 1999, will be recorded only when cash is actually received.
Income tax. Due to the net losses for the three months ended October 31,
1998 and 1997, there was no income tax expense in either period. At July 31,
1998, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $8.8 million. The ability to utilize such net
operating loss carryforwards, which expire in the years 2009 to 2013, may be
significantly limited by the application of the "change of ownership" rules
under Section 382 of the Internal Revenue Code.
Historically, the Company has received the majority of its total annual
revenues during the months of October through March. Such pattern is
attributable to the seasonal demand for LPG, which is typically greatest during
21
<PAGE>
the winter months of the second and third quarters of the Company's fiscal year.
The Company's quarterly earnings may vary considerably due to the impact of such
seasonality.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations and has a deficit in working capital and
stockholders' equity. In addition, the Company is involved in litigation, the
outcome of which cannot be determined at the present time. The Company depends
heavily on sales to one major customer. The Company's sources of liquidity and
capital resources historically have been provided by sales of LPG and
CNG-related equipment, proceeds from the issuance of short-term and long-term
debt, revolving credit facilities and credit arrangements, sale or issuance of
preferred and common stock of the Company and proceeds from the exercise of
warrants to purchase shares of the Company's common stock.
The following summary table reflects comparative cash flows for the three
months ended October 31, 1998 and 1997. All information is in thousands.
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
---------------------- -------------
<S> <C> <C>
Net cash used in operating activities . . $ ( 467) $ ( 987)
Net cash provided by (used in) investing. ( 27) ( 211)
Activities
Net cash provided by financing activities 360 1,568
---------------------- -------------
Net increase (decrease) in cash . . . . . ( 134) $ 370
====================== =============
</TABLE>
The PMI Sales Agreement is effective for the period from October 1, 1998
through September 30, 1999 and provides for the purchase by PMI of minimum
monthly volumes of LPG aggregating a minimum annual volume of 69.0 million
gallons, similar to minimum volume requirements under the previous sales
agreement with PMI effective during the period from October 1, 1997 to September
30, 1998. During October 1998, the Company entered into a monthly supply
agreement with Exxon pursuant to which Exxon agreed to supply minimum volumes of
LPG to the Company. Effective November 1, 1998, the Company entered into a
supply agreement with Exxon to purchase minimum monthly volumes of LPG through
September 1999. The Company believes it has access to an adequate supply of LPG
from Exxon and other suppliers to satisfy the requirements of PMI under the PMI
Sales Agreement. In determining whether any supplier will be utilized, the
Company will consider the applicable prices charged as well as any additional
fees that may be required to be paid under the Pipeline Lease. The Company
anticipates 10% - 15% lower gross margins on its LPG sales as a result of
increased LPG costs beginning October 1998 compared with the previous
agreements.
22
<PAGE>
Pipeline Lease. The Pipeline Lease currently expires on March 31, 2013,
pursuant to an amendment entered into between the Company and Seadrift on May
21, 1997, effective on April 1, 1998 (the "Pipeline Lease Amendment"). The
Pipeline Lease Amendment provides, among other things, for additional storage
access and inter-connection with another pipeline controlled by Seadrift,
thereby providing greater access to and from the Pipeline. Pursuant to the
Pipeline Lease Amendment, the Company's fixed annual fee associated with the use
of the Pipeline was increased by $350,000. In addition, the Pipeline Lease
Amendment also provides for variable rental increases based on monthly volumes
purchased and flowing into the Pipeline. As of October 31, 1998, Seadrift had
yet to make certain improvements which the Company believes were the basis of
the increase in rent required under the Pipeline Lease Amendment ("Basic
Improvements"). Accordingly, Seadrift has continued to invoice the Company, and
the Company has continued to make lease payments to Seadrift as prescribed under
the Pipeline Lease. The Company further believes that the term of the Pipeline
Lease Amendment shall commence upon the completion of the Basic Improvements and
terminate fifteen years thereafter. The Company believes the extension of the
Pipeline Lease gives the Company increased flexibility in negotiating sales and
supply agreements with its customers and suppliers. During November 1998, the
Company issued a promissory note to Seadrift for $261,206, representing all
outstanding rental obligations owed to Seadrift through November 1998. The
promisorry note is payable in six installments beginning November 25, 1998 and
ending February 3, 1999. Interest on the promissory note is 10% per annum.
Credit Arrangements. In connection with the PMI Sales Agreement, invoicing
is to occur weekly. From November 1996 to early November 1997, the Company and
PMI made an arrangement under which PMI provided financing on the Company's
behalf under the terms of the Company's supply agreement with Exxon, the
Company's main supplier. As a result of this arrangement, invoicing occurred on
a monthly, rather than a weekly basis.
On October 22, 1997, the Company entered into a $6.0 million credit
facility with RZB Finance L.L.C. (RZB) for demand loans and standby letters of
credit (RZB Credit Facility) to finance the Company's purchase of LPG. Under
the RZB Credit Facility, the Company pays a fee with respect to each letter of
credit thereunder in an amount equal to the greater of (i) $500, (ii) 1.5% of
the maximum face amount of such letter of credit, or (iii) such higher amount as
may be agreed to between the Company and RZB. Any amounts outstanding under the
RZB Credit Facility shall accrue interest at a rate equal to the rate announced
by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant to the RZB
Credit Facility, RZB has sole and absolute discretion to terminate the RZB
Credit Facility and to make any loan or issue any letter of credit thereunder.
RZB also has the right to demand payment of any and all amounts outstanding
under the RZB Credit Facility at any time. In connection with the RZB Credit
Facility, the Company granted a mortgage, security interest and assignment in
any and all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the lease
with the Brownsville Navigation District of Cameron County for the land on which
the Company's Brownsville Terminal Facility is located, the Pipeline Lease, and
in connection therewith agreed to enter into leasehold deeds of trust, security
agreements, financing statements and assignments of rent, in forms satisfactory
to RZB. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any nature on
any of its properties or assets, except in favor of RZB, without the consent of
RZB. The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect to
the RZB Credit Facility. Upon establishment of the RZB Credit Facility,
beginning November 11, 1997, PMI no longer provided any financing on behalf of
the Company, and the Company began invoicing PMI on a weekly basis.
23
<PAGE>
Effective April 22, 1998, the aggregate amount available under the RZB
Credit Facility was increased to $7.0 million. The Company believes that based
on current market prices of LPG and LPG volume requirements under the PMI Sales
Agreement, the RZB Credit Facility is adequate.
In connection with the Company's purchases of LPG from Exxon and/or PG&E
NGL Marketing, L.P., the Company issues letters of credit on a monthly basis
based on anticipated purchases.
As of October 31, 1998, letters of credit established under the
RZB Credit Facility in favor of Exxon for purchases of LPG totaled $6.0 million
of which $1.2 million was being used to secure unpaid purchases from Exxon as of
October 31, 1998. In addition, as of October 31, 1998, the Company had $1.4
million of loans outstanding under the RZB Credit Facility. In connection with
these purchases, as of October 31, 1998, the Company had unpaid invoices due
from PMI totaling $1.8 million and cash balances maintained in the RZB Credit
Facility collateral account of $779.
During June 1998, a letter of credit was established under the RZB Credit
Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG totaling
$360,000. The letter of credit expired during August 1998.
During November 1998, a letter of credit was established under the RZB
Credit Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG
totaling $176,000.
Private Placements and Other Transactions. On October 21, 1997, the
Company completed a private placement pursuant to which it issued promissory
notes in the aggregate principal amount of $1.5 million and warrants to purchase
250,000 shares of common stock exercisable until October 21, 2000 at an exercise
price of $6.00 per share. The notes were unsecured. Proceeds raised from the
private placement totaled $1.5 million, which the Company used for working
capital requirements. Interest at 10% per annum was due quarterly on March 31,
June 30, September 30 and December 31. Payment of the principal and accrued
interest on the promissory notes was due on June 30, 1998. On December 1, 1998,
the Company completed a rollover and assignment agreement effectively extending
the due date of the promissory notes until June 30, 1999 (the "Rollover
Agreement"). In connection with the Rollover Agreement, the Company agreed to
assign its rights to any net cash collected from the Judgment towards any unpaid
principal and interest owing on the promissory notes. The Company also agreed
to use any net proceeds received by the Company from any public offering of debt
or equity of the Company in excess of than $2,250,000, towards the repayment of
any balances owing under the promissory notes. The promissory note holders also
received additional warrants to purchase 337,500 shares of common stock,
exercisable until November 30, 2001, at an exercise price of $1.75 per share.
The purchasers in the private placement were granted one demand registration
right with respect to the shares issuable upon exercise of the warrants.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 75,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 12, 2000
for an amount of $250,000. Net proceeds from the sale were used for working
capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common stock of
the Company and warrants to purchase 300,000 shares of common stock with an
exercise price of $1.75 per warrant and an expiration date of December 13, 2003
for an amount of $500,000. Net proceeds from the sale will be used for working
capital purposes.
During December 1998, the Company issued 53,884 shares of common stock of
the Company to Zimmerman Holdings Inc. (ZHI), as payment for and full
cancellation of a note payable of $100,000 and related interest and other
obligations totaling $18,000 and the cancellation of any further obligation to
pay any future royalties in connection with Company's purchase of certain CNG
assets from Wilson Technologies Inc., a wholly owned subsidiary of ZHI.
24
<PAGE>
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville in the
amount of $3.2 million. As of October 31, 1998, the net amount of the award is
approximately $3.5 million, which is comprised of the sum of (i) the original
award, including attorney's fees, (ii) post-award interest, and (iii)
cancellation of the note and accrued interest payable which is included in the
Consolidated Financial Statements, less attorneys' fees. The Judgment is being
appealed by the defendant. Although no assurance can be made, management
believes that the Company will ultimately prevail on appeal and will receive the
proceeds from such Judgment. A significant portion of the Judgment, upon
realization by the Company, will be used to pay attorneys' fees incurred in
connection with the IBC-Brownsville litigation. In addition, a former officer of
the Company is entitled to 5% of the net proceeds (after expenses and legal
fees) and amounts have been assigned to the promissory note holders. See note
and L to the Consolidated Financial Statements.
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection of
the Judgment, the Company's ability to obtain additional financing and to raise
additional equity capital, and the success of the Company's future operations.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base, (iv)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines and (vi) raise additional debt and/or
equity capital. See note I to the Consolidated Financial Statements.
Year 2000 Date Conversion. Management has determined that the consequences
of its Year 2000 issues will not have a material effect on the Company's
business, results of operations, or financial condition.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per Share, and
requires the calculation and dual presentation of basic and diluted earnings per
share (EPS), replacing the measures of primary and fully-diluted EPS as reported
under Opinion No. 15. SFAS 128 became effective for financial statements issued
for periods ending after December 15, 1997; earlier application was not
permitted. Accordingly, EPS for the periods presented in the accompanying
consolidated statements of operations are calculated under the guidance of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997.
25
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note H to the unaudited Consolidated Financial Statements and Note
O to the Company's Annual Report on Form 10-K for the year ended July
31, 1998.
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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Exhibits are incorporated herein by reference:
EXHIBIT NO.
- ------------
10.71 LPG Mix Purchase Contract dated September 28, 1998 between P.M.I.
Trading Limited and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1998
filed on November 13, 1998, SEC File No. 000-24394)
The following material contracts are filed as part of this report:
10.72 LPG Sales Agreement dated November 16, 1998 between Exxon and the
Company.
10.73 Rollover and Assignment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry
D. Snavely IRA and the Company.
10.74 Registration Rights Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry
D. Snavely IRA and the Company.
10.75 Collateral Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA
and the Company.
10.76 Assignment of Judgment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry
D. Snavely IRA and the Company.
26
<PAGE>
10.77 Amended Promissory Note dated December 1, 1998 between Castle Energy
Corporation and the Company.
10.78 Common Stock Purchase Warrant dated December 1, 1998 issued to Castle
Energy Corporation by the Company.
10.79 Amended Promissory Note dated December 1, 1998 between Clint Norton
and the Company.
10.80 Common Stock Purchase Warrant dated December 1, 1998 issued to Clint
Norton by the Company.
10.81 Amended Promissory Note dated December 1, 1998 between Southwest
Concept, Inc. and the Company.
10.82 Common Stock Purchase Warrant dated December 1, 1998 issued to
Southwest Concept, Inc. by the Company.
10.83 Amended Promissory Note dated December 1, 1998 between James F. Meara,
Jr. and the Company.
10.84 Common Stock Purchase Warrant dated December 1, 1998 issued to James
F. Meara, Jr. by the Company.
10.85 Amended Promissory Note dated December 1, 1998 between Donaldson
Luftkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA and the Company.
10.86 Common Stock Purchase Warrant dated December 1, 1998 issued to
Donaldson Luftkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA and the Company.
10.87 Amended Promissory Note dated December 1, 1998 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company.
10.88 Common Stock Purchase Warrant dated December 1, 1998 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company.
10.89 Purchase Agreement dated November 13, 1998 between Van Moer Santerre &
Company and the Company.
10.90 Registration Rights Agreement dated November 13, 1998 among Van Moer
Santerre & Company and the Company.
10.91 Common Stock Purchase Warrant dated November 13, 1998 issued to Van
Moer Santerre & Company by the Company.
10.92 Purchase Agreement dated December 14, 1998 between KFP Grand LTD. and
the Company.
10.93 Registration Rights Agreement dated December 14, 1998 among KFP Grand
LTD. and the Company.
10.94 Common Stock Purchase Warrant dated December 14, 1998 issued to KFP
Grand LTD. by the Company.
10.95 Second Amendment of the Interim Operating Agreement dated December 15,
1998 among Wilson Technologies Inc., Zimmerman Holdings, Inc. and the
Company.
27
<PAGE>
27.1 Financial Data Schedule. (Filed herewith.)
b. Reports on Form 8-K.
The following Reports on Form 8-K are incorporated herein by reference:
None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
December 18, 1998 By: /s/ Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
29
<PAGE>
PENN OCTANE CORPORATION/EXXON COMPANY, U.S.A.
SALE AGREEMENT
PENN NO. ___/EXXON NO. PEB221
* The Sale Agreement set forth below hereby replaces the Sale Agreement which
had an effective date of November 1, 1997, entered into by and between
Exxon Company, U.S.A. (a division of Exxon Corporation), hereinafter called
"Exxon" and Penn Octane Corporation, hereinafter called "Penn".
* The Sale Agreement (November 1, 1997) is revised effective November 1,
1998, to revise the volume and pricing and to extend the term through
September 30, 1999.
Penn and Exxon agree to a product sale as outline below:
1. TERM OF AGREEMENT
-------------------
* This Agreement shall begin with the first shipment to Penn in November 1998
and shall continue through September 30, 1999.
2. PRODUCT VOLUMES/PRICES
-----------------------
* Exxon agrees to deliver to Penn the approximate product volumes show on
Exhibit A during the term of this Agreement at the location and pricing
basis outlined in Exhibit A.
3. PRODUCT SPECIFICATIONS
-----------------------
Exxon shall deliver to Penn products that meets applicable federal, state
and local requirements, as shown below:
- Propane Butane Mix: 90 vol % Propane and 10 vol % Butane, meeting HD5
------------------
spec unodorized.
4. GENERAL PROVISIONS
-------------------
Exxon's General Provisions dated December 1996 and attached as Exhibit C
are incorporated herein by reference and made a part hereof.
5. EXPORTS/IMPORTS
---------------
This is a domestic transaction. Penn is responsible for obtaining export
licenses and/or export documentation required for any subsequent
exportation that may occur.
6. ACCOUNTING
----------
Forward all shipping documents, statements, and invoices, and demurrage
claims to:
PENN OCTANE CORPORATION
12118 South Bloomfield
Santa Fe Springs, CA 90670
Attention: Ian Bothwell
Page 1 of 2
<PAGE>
Send payments by wire transfer to:
CITIBANK, N.A.
ABA 0201-0008-9
Credit to Exxon Company U.S.A.
Regular Account # 00034219
7. INVOICE PAYMENT METHOD/TERMS
------------------------------
In accordance with Exhibit C, General Provisions, except that invoices
shall be issued weekly and shall be paid by wire transfer with payment due
twelve (12) working days from receipt of invoice and acceptable supporting
documentation. If the invoice and acceptable supporting documentation are
received at the billing address on or before 12:00 noon on a working day,
working day 1 begins on that day. If the invoice and acceptable supporting
documentation are received at the billing address after 12:00 noon (or on a
non-working day), working day 1 begins on the first working day following
receipt.
If the transaction if effected via book transfer, quantity to be exact
barrels. Payment due date shall be the effective book transfer date,
provided the invoice and book transfer confirmation have been received by
12:00 noon on the day preceding the effective book transfer date;
otherwise, the payment due date shall be the next business day following
receipt of invoice and book transfer confirmation.
8. CREDIT PROVISIONS
------------------
Penn agrees to provide a letter of credit acceptable to Exxon. Credit
balances shall be monitored by Exxon, and amendments to the letter of
credit may be required when it appears that those balances may exceed
current security levels. Timely receipt by Exxon of acceptable security and
amendments is a condition precedent to Exxon's performance under this
Agreement. Any letter of credit provided to Exxon must be issued in a
format, for and amount, by a bank and for a time duration acceptable to
Exxon.
9. EXHIBITS
--------
The following Exhibits are attached and are a part of this Agreement. All
references herein to the Agreement shall include the applicable Exhibits.
Exhibit A - Product Volumes/Locations/Differentials
Exhibit B - Product Specifications - Note Used (see paragraph 3)
Exhibit C - General Provisions
EXXON COMPANY, U.S.A. PENN OCTANE CORPORATION
a division of Exxon Corporation
BY _________________________________ BY _____________________________
F.S. Panebianco
Manager, Products and Gas Liquids TITLE __________________________
DATE _________________________________ DATE ___________________________
Page 2 of 2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
PRODUCT VOLUMES/LOCATIONS/DIFFERENTIALS
PENN NO. _______/EXXON NO. PEB221
SALE AGREEMENT
EXXON DELIVERS
- ---------------
*Quantity
Product Method Approximate *Exxon Receives
Location Description of Delivery Measurement Bbls/Daily Price
- ------------------ -------------- ---------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Exxon's King Ranch Propane/Butane Into UCC By meter ticket 9,000 (Nov - Mar) (1)
Gas Plant. . . . . Mix Ella-Brownsville at origin 6,600 (Apr - Sep)
6" pipeline
<FN>
* (1) Price - Mt. Belvieu, TX Oil Price Information Service (OPIS) NON TET price average for the
first business day for interim pricing less x.x xxxx per gallon for each product.
Invoices will be issued weekly. At the end of the month, pricing will be adjusted to the
Mt. Belvieu OPIS NON TET day weighted average for the delivery month for each product less
x.x xxxx per gallon.
</TABLE>
Page 1 of 1
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
EXXON COMPANY, U.S.A. (A DIVISION OF EXXON CORPORATION)
PETROLEUM PRODUCTS & NATURAL GAS LIQUIDS
----------------------------------------
DECEMBER 1996
INDEX TO GENERAL PROVISIONS
---------------------------
Page Number
------------
<C> <S> <C>
1. Special Provisions Shall Govern . . . 1
2. Deliveries. . . . . . . . . . . . . . 1
3. Volumes . . . . . . . . . . . . . . . 1
4. Measurements. . . . . . . . . . . . . 1
5. Data Integrity. . . . . . . . . . . . 1
6. Inspection. . . . . . . . . . . . . . 2
7. Title . . . . . . . . . . . . . . . . 2
8. Importer/Exporter of Record . . . . . 2
9. Drawback. . . . . . . . . . . . . . . 2
10. Warranty. . . . . . . . . . . . . . . 2
11. Additional Equipment. . . . . . . . . 3
12. Safety Regulations. . . . . . . . . . 3
13. Safety and Health Information . . . . 3
14. Statements and Invoices (Exchanges) . 3
Payment (Purchases and Sales) . . . . 3
15. Taxes . . . . . . . . . . . . . . . . 4
16. Financial Responsibility. . . . . . . 4
17. Exchange Basis. . . . . . . . . . . . 4
Balances Products . . . . . . . . . . 5
Balances Natural Gas Liquids. . . . . 5
Exchange Imbalances . . . . . . . . . .5
18. Set-Off . . . . . . . . . . . . . . . 5
19. Continuing Obligation . . . . . . . . 5
20. Applicable Laws . . . . . . . . . . . 5
21. Compliance with Laws and Regulations. 5
22. Product Compliance and Documentation. 5
23. Indemnity . . . . . . . . . . . . . . 6
24. Claims. . . . . . . . . . . . . . . . 6
25. Waiver. . . . . . . . . . . . . . . . 6
26. Force Majeure and Contingencies . . . 6
27. Business Practices. . . . . . . . . . 7
28. Conflict of Interest. . . . . . . . . 7
29. Audit . . . . . . . . . . . . . . . . 7
30. Assignment. . . . . . . . . . . . . . 7
31. Odorization . . . . . . . . . . . . . 7
32. Quality . . . . . . . . . . . . . . . 8
33. Storage . . . . . . . . . . . . . . . 8
34. Demurrage on Tank Cars. . . . . . . . 8
</TABLE>
<PAGE>
PAGE 1 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
EXXON COMPANY, U.S.A. (A DIVISION OF EXXON ORPORATION)
PETROLEUM PRODUCTS & NATURAL GAS LIQUIDS
GENERAL PROVISIONS FOR EXCHANGE, PURCHASE, AND SALE AGREEMENTS
1. Special Provisions Shall Govern - All provision of this Agreement
----------------------------------
(including amendments) other than the "General Provisions" and "Marine
Provisions" (if applicable) comprise the "Special Provisions". In the event
of any conflict between the Special Provisions and the General Provisions,
the Special Provisions shall govern. In the event of any conflict between
the Marine Provisions and the General Provisions, the Marine Provisions
shall govern.
2. Deliveries - Deliveries shall be made at such times within the contract
----------
delivery window, as may be required by Receiving Party provided that
reasonable advance notice of each delivery has been given by the Receiving
Party. At the time of giving notice, the Receiving Party shall furnish
Delivering Party all necessary shipping instructions. At the time of
delivery, the Delivering Party shall prepare and furnish the Receiving
Party with copies of bills of lading and other shipping papers. Deliveries
into trucks and/or tank cars shall be made within the delivering terminal's
usual business hours (See Exhibit "E" for Truck Loading Documentation /
Communications Requirements as applicable). Where applicable, Receiving
Party agrees to Delivering Party's Facility Access Agreement prior to
withdrawal of product from Delivering Party's truck loading rack.
3. Volumes - Unless otherwise specifically indicated, all quantities
-------
delivered shall be adjusted to net gallons at 60 deg F. in accordance with
ASTM D-1250 Petroleum Measurement Tables, or latest revisions thereof. A
barrel shall consist of 42 U.S. gallons and a U.S. gallon shall contain 231
cubic inches.
4. Measurements - Unless otherwise specified, quantities delivered:
------------
(A) into or from transport trucks shall be measured by calibrated meters,
or if such meters are unavailable, by applicable calibration tables;
(B) into or from tank cars shall be measured by calibrated meters, or if
such meters are unavailable, by applicable calibrated tank car tables;
(C) into or from private pipelines shall be measured by calibrated meters,
or if such meters are unavailable, by terminal tank gauges; and
(D) into or from common carrier pipeline shall be measured by carrier's
meter tickets.
Meters and temperature probes shall be calibrated according to applicable
API standards (but not less frequently than once every six (6) months).
Receiving Party given reasonable cause shall have the right at its expense
to independently certify and calibration. Each party to the Agreement shall
have the right to have one representative present, in addition to the
independent inspector, to witness all gauges, tests, meter calibration, and
measurements. Such representative must comply with any applicable dock,
terminal and/or pipeline facilities' safety procedures and/or requirements.
However, the gauges, tests, meter calibration, and measurements of the
independent inspector, when present, shall be deemed to be binding.
5. Data Integrity - Delivering Party shall be accountable for the integrity
---------------
of any product quality test performed by it, and the results of any product
quality test performed by a third party laboratory employed by it, in
connection with this Agreement, including the recording and retention of
such data. Delivering Party agrees as to any such test performed by it:
(A) Product quality test measurements shall be complete, accurate and
timely based upon unaltered samples collected in a manner which would
be expected to yield reasonably representative samples or which have
been collected in the manner specified by written agreement between
the Parties.
(B) Specified industry standard test methods and instrument calibration
procedures shall be used without modification, unless that
modification has been approved by industry standard or written
agreement between the Parties, or unless the certificates of analysis
of such data indicate such test method or procedure was altered. In no
event will any such alteration yield materially different test
results, unless approved in writing.
<PAGE>
PAGE 2 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
(C) A quality assurance system shall be in place for any laboratory
facility involved. This system shall be designed to aid in the
deterrence, detection and correction of any incorrect data generated
or communicated and shall also include the maintenance and calibration
of measurement instruments
(D) Testing and measurement personnel involved shall be trained in the
necessary skills involved in data generation and data management. This
shall include initial and ongoing personnel training, testing, and
verification of knowledge transfer.
(E) Delivering Party shall utilize a self-monitoring and assessment system
to determine the extent to which the requirements above are being met.
This system shall include the resolution of problems found in the
assessments, with plans and responsibilities for appropriate
follow-up.
6. Inspection - Unless otherwise agreed:
----------
(A) Quantity - For all deliveries into or from pipelines where terminal
--------
tank gauges must be used for measurement, and into or from marine
vessels, quantity shall be determined by independent licensed
petroleum inspector. Either party may arrange for the inspector, and
the cost of the inspection service shall be shared equally between
both parties.
(B) Quality - For all deliveries into or from pipelines where terminal
-------
tank gauges are required, and into or from marine vessels, quality
inspection by independent licensed petroleum inspector may be
requested with tests specified by the Receiving Party and the costs of
the inspection service shared equally.
7. Title - Title to, and all risk of loss of or damage to, any product
-----
delivered shall pass as follows:
(A) when into transport and tank cars as product enters the Receiving
Party's equipment;
(B) when into pipeline as product enters the receiving equipment;
(C) when into any storage (other than from marine vessels), when product
passes into the receiving facilities of the Receiving Party; and
(D) when by book, stock, and/or inventory transfer, on the effective date
of the transfer.
8. Importer/Exporter of Record - The party that is the Importer/Exporter of
---------------------------
Record of the petroleum products received/delivered under this Agreement
agrees to fulfill all requirements applicable to the Importer/Exporter of
Record, including but not limited to those of the U.S. Customs and shall
pay any applicable import duty or any other applicable fees and fines,
penalties or costs. The other party hereto shall provide all information
necessary for such importation/exportation in a timely manner.
9. Drawback - Unless otherwise negotiated and confirmed in writing, the
--------
Delivery Party retains the right to claim, receive, and retain drawbacks on
imported duty-paid products and whenever such products are exported, the
exporting party shall promptly notify the Delivering Party and shall
execute drawback claim forms and assignments in favor of the Delivering
Party to enable it to establish its drawback rights under U.S. Customs
Regulations.
10. Warranty - The Delivery Party warrants:
--------
(A) that the product conforms to the product specifications set forth in
the Agreement;
(B) that the Delivering Party has free and clear title to the product
delivered under the Agreement;
(C) that such product shall be delivered free from lawful security
interests, liens, taxes, and encumbrances;
(D) that to the best of Delivering Party's knowledge, the product in the
form delivered is free from any valid claim for patent infringement;
and
(E) that the Delivering Party has or shall obtain, at its expense, all the
necessary registrations, certificates, permits, licenses and
authorizations to deliver the product pursuant to this Agreement.
THE DELIVERING PARTY MAKES NO OTHER WARRANTIES, EXPRESSED OR IMPLIED,
INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY AND THAT OF FITNESS FOR A
PARTICULAR PURPOSE, IN NO EVENT, REGARDLESS OF NEGLIGENCE, SHALL EITHER
PARTY BE LIABLE FOR PUNITIVE DAMAGES.
All warranties made under the Agreement shall survive acceptance of or
payment for the products by Receiving Party.
<PAGE>
PAGE 3 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
11. Additional Equipment - Both parties agree that either party may elect to
---------------------
install additional equipment at the other party's terminal provided that
the engineering and installation of any fixture, equipment, or appurtenance
placed at the terminal(s) shall be subject to terminal operator's approval
and supervision. The terminal operator shall obtain necessary permits or
licenses for such equipment. Unless parties agree in writing to the
contrary, such additional equipment shall be the property of requesting
party, and requesting party shall pay for, operate, and maintain such
additional equipment, and upon termination of this Agreement, remove
additional equipment and restore the terminal to its condition prior to the
installation of such additional equipment. Should aforementioned equipment
be observed by the terminal operator to be deficient in operation, terminal
operator will notify the equipment owner immediately.
12. Safety Regulations - Each party agrees that its agents, representatives,
-------------------
and employees will comply with all applicable safety regulations of the
other's facilities when such agents, representatives, or employees are upon
the facilities of the other in connection with the performance of this
Agreement. For either party desiring written copies of these regulations,
copies may be obtained by request to the local office operating the
facility.
13. Safety and Health Information - The Delivering Party will furnish to the
------------------------------
Receiving Party information (including Material Safety Data Sheet(s)
concerning the safety and health aspects of product(s) delivered to the
Receiving Party hereunder, including safety and health warnings. The
Receiving Party agrees to communicate such warnings and information to all
persons whom the Receiving Party can reasonably foresee may be exposed to
or may handle such products, including, but not limited to, the Receiving
Party's employees, agents, contractors, and customers.
14. Statementsand Invoices (Exchanges) - Unless otherwise provided in the
----------------------------------
Special Provisions of this Agreement, each party shall render to the other,
at the end of each calendar month, statements, reconciliations of exchange
balances, as well as invoices for any differentials, charges, and taxes
payable or reimbursable to it, with respect to its deliveries during the
month. Each invoices shall be paid (without discount) with fourteen (14)
days after receipt. Unless otherwise specified, in the event the payment
due date falls on a Sunday or Monday banking holiday, payment will be due
on the next succeeding business day. In the event the payment due date
falls on a Saturday or bank holiday other than a Monday, payment will be
due on the first, preceding business day.
Payment (Purchases & Sales) - Unless otherwise provided in the Special
-----------------------------
Provisions of this Agreement, each invoice will be paid net three (3)
working days by wire transfer from receipt of invoice and acceptable
supporting documents. If the invoice and acceptable supporting
documentation are received at the billing address on or before 12:00 noon
(Central Standard Time) on a working day, working day one (1) begins on
that day. If the invoice and acceptable supporting documentation are
received at the billing address after 12:00 noon (Central Standard Time)
(or on a non-working day), working day one (1) begins on the first working
day following receipt. Unless otherwise specified, in the event the payment
due date falls on a Sunday or Monday banking holiday, payment will be due
on the next succeeding business day. In the event the payment due date
falls on a Saturday or bank holiday other than a Monday, payment will be
due on the first preceding business day. If Receiving Party fails to comply
with the terms of payment, Delivering Party may, at its option: a) change
the terms of payment; b) without notice to Receiving Party, defer or divert
shipments until payments are made; and c) cancel this Agreement in which
event, Delivering Party shall not be required to make further shipments
hereunder. In the event of a, b, or c, Receiving Party will reimburse
Delivering Party for all actual collection and legal fees incurred to
affect Receiving Party's payment and interest incurred on unpaid amounts
and said fees. The exercise by either party of any right reserved under
this paragraph shall be without prejudice to any claim for damages or any
other right under this Agreement or any other agreement or applicable law.
If the transaction is effective via book transfer, quantity to be exact
barrels and due date shall be the effective book transfer date, provided
the invoice and book transfer confirmations have been received by 12:00
noon (Central Standard Time) on the day preceding the book transfer date;
otherwise, the due date shall be the next business day following receipt of
the invoice and book transfer confirmation.
<PAGE>
PAGE 4 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
15. Taxes - Unless otherwise specifically provided elsewhere in this Agreement,
-----
or required by law, the Receiving Party shall pay (or reimburse) the
Delivering Party for its payment of taxes, fees, or other similar levies
which are levied or assessed upon the purchase, exchange, use, resale,
withdrawal, transportation, or handling of the products if levied or
assessed at the time of or after delivery to the Receiving Party. Such
taxes, fees, or other similar levies include, but are not limited to,
federal manufacturers excise taxes, environmental taxes (which are not
based on alternative minimum taxable income of the Delivering Party), state
and local motor fuel taxes, state and local sales and use taxes, "oil
company" gross receipts or franchise taxes (which are not based on or
measured by the net income or net worth of the Delivering Party), business
and occupation taxes (except business and occupation taxes levied by the
State of Washington or any political subdivision thereof, which shall be
paid by the Delivering Party without reimbursement from the Receiving
Party), state and local inspection fees, and state and local oil spill
taxes or fees. If gasoline, diesel, or aviation fuel is sold, purchased, or
exchanged hereunder, each party represents that it is a registered producer
of gasoline, diesel, or aviation fuel for the purpose of the federal
manufacturers excise tax.
The receiving party represents that it holds the applicable state tax
registrations to purchase, exchange, use, resale, transport or handle the
products. Such receiving party must furnish the delivering party with the
appropriate state registration number(s) for all state in which business is
conducted. In addition, the receiving party must furnish their federal
employer identification number to delivering party. These notifications
must be received by the delivering party within thirty (30) days of
contract execution or applicable state taxes will be invoiced. Receiving
party is also required to notify delivering party of any change in
registration status in states where business is conducted. Notification of
state registration numbers or changes in registration status must be mail
to Exxon Company, U.S.A., Tax Department, P.O. Box 4541, Houston, Texas
77210-4541.
If the Receiving Party claims exemption from any of the aforesaid taxes,
then Receiving Party must furnish the Delivering Party with a properly
completed and executed exemption certificate in the form prescribed by the
appropriate taxing authority in lieu of payment of or reimbursement of such
taxes to the Delivering Party. Receiving Party shall promptly notify
Delivering Party in writing of any change in the status of its exemption
certificate.
16. Financial Responsibility - If, during the term of this Agreement and any
-------------------------
liquidation thereof, the financial responsibility (including, but not
limited to, either party's ability to perform under any warranty of title
provided thereunder) of either party becomes impaired or unsatisfactory to
the other party, advance cash payment, properly endorsed negotiable bills
of lading, or satisfactory security reasonably acceptable to the demanding
party shall be given upon demand, and performance under this Agreement or
any other agreement may be withheld until such payment, bills of lading, or
security reasonably acceptable to the demanding party is received. If such
payment, bills of lading, or security reasonably acceptable to the
demanding party is not received within fifteen (15) calendar days from
demand therefore, the party demanding such payment, bill of lading, or
security may cancel this Agreement. In the event either party makes an
assignment for the benefit or creditors or any general arrangement with
creditors, the other party may cancel this Agreement without notice. The
exercise by either party of any right reserved under this paragraph shall
be without prejudice to any claim for damages or any other right under this
Agreement or any other agreement or applicable law.
17. Exchange Basis - Except for the differentials, taxes, governmental fees, or
--------------
other payments expressly provided in the Special Provisions, the Agreement
shall be on a barrel-for-barrel basis without the payment of money by one
party to the other party.
Balances - Unless otherwise specified in the Special Provisions, both
--------
parties will keep the volumes exchanged under the Agreement in approximate
balance at all times. Upon termination of this Agreement and after the
reconciliation and agreement of balances, all remaining balances shall be
settled within ninety (90) calendar days as follows:
<PAGE>
PAGE 5 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
(A) Products
1. Any product balances equal to or greater than 5,000 barrels will
be settled by either a physical delivery or a book transfer to
another agreement as mutually agreed in writing before such
settlement is made.
2. Any product balance less than 5,000 barrels will be settled by
either a book transfer to another agreement or be bought or sold
based on a price as mutually agreed in writing before such
settlement is made. If not other basis has been agreed upon, the
price for the product will be the month average contract price
for the date of last activity.
(B) Natural Gas Liquids
1. Any product balance equal to or greater than 1,000 barrels will
be settled by either a physical delivery or a book transfer to
another agreement as mutually agreed in writing before such
settlement is made.
2. Any product balance less than 1,000 barrels will be settled by
either a book transfer to another agreement, a stock transfer, or
be bought or sold based on a price as mutually agreed in writing
before such settlement is made.
Exchange Imbalances - In the event an exchange imbalance arises as a result
-------------------
of one party delivering prior to or more than the other party, subsequent
deliveries shall be applied first to such exchange imbalance, and then to
further delivery obligations, if any, under this Agreement.
18. Set-off - In the event either party shall fall to make timely deliver of
-------
any product(s) due and owing to the other party, or in the party, or in the
event either party shall fail to make timely payment or reimbursement of
any monies due and owing to the other party, the other party may set-off
any deliveries or payments or reimbursements due under this Agreement or
any other agreement between the parties during the term of this Agreement
any liquidation thereof with prior written notice.
19. Continuing Obligation - The parties do not intend to create a continuing
----------------------
obligation to buy, sell, or exchange petroleum products other than as
specified in the Special Provisions. Accordingly, each party expressly
waives any right it may have under any existing or future, state or federal
government regulations to insist upon the continued purchase, sale, or
exchange of petroleum products provided in this Agreement.
20. Applicable Laws - THIS AGREEMENT SHALL BE INTERPRETED IN ACCORDANCE WITH
----------------
THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ANY CHOICE OF LAW RULES,
NOTWITHSTANDING ANYTING TO THE CONTRARY, THIS AGREEMENT SHALL NOT BE
INTERPRETED OR APPLIED SO AS TO REQUIRE EITHER PARTY TO DO, OR TO REFRAIN
FROM DOING, ANYTHING WHICH WOULD CONSTITUTE A VIOLATION OF ANY U.S. LAWS OR
REGULATIONS.
21. Compliance With Laws and Regulations - Each party shall be responsible and
-------------------------------------
liable for and agrees to indemnify and hold the other party harmless
against all costs, expenses, losses, claims, damages, assessments
(including without limitation professional fees, penalties, and interest),
causes of action, judgements, fines, settlements, penalties and liabilities
(joint and several), without regard to amount, arising out of, caused by,
or resulting from the indemnifying party's failure to comply, or
indemnifying party's products failure to comply, with all applicable
federal, state, and local laws, ordinances, orders, rules and regulations,
including but not limited to, those governing Reid Vapor Pressure, low
sulfur diesel, reformulated gasoline, and additives. The Delivering Party
certifies that he product(s) it delivers under the Agreement will be
produced and delivered in full compliance with all applicable governmental
laws, regulations, and orders including, but not limited to, the Clean Air
Act and the EPA regulations promulgated thereunder, the Equal Opportunity
Clause contained in 41 C.F.R. 60-1.4 relating to race, color, religion,
sex, or national origin, the Affirmative Action Clause contained in 41
C.F.R. 60-250.4 relating to disabled veterans and to veterans of the
Vietnam Era, and the Affirmative Action Clause contained in 41 C.F.R.
60-741.4 relating to handicapped workers are incorporated herein by
reference.
22. Product Compliance and Documentation -
---------------------------------------
(A) Gasoline - Each party agrees to comply with all federal, state, and
local volatility regulations for gasoline and alcohol blends (including,
but not limited to, 40 C.F.R. 80.27 and 80.28) and to comply with all
federal and state
<PAGE>
PAGE 6 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
laws for oxygenated gasoline. Delivering party hereby certifies that any
product delivered pursuant to this Agreement is in compliance with the
standards(s) applicable to the delivery location when delivered to the
receiving party. Delivering party agrees to provide to receiving party for
each delivery of certificate of analysis, a bill of lading, a delivery
ticket, or a loading ticket that certifies and correctly states the maximum
Ried Vapor Pressure (RVP) of the product at the time of delivery during the
government mandated season for RVP and that certifies that the product is
in compliance with all applicable regulations during the control period for
oxygenated gasoline. Receiving party agrees to sell, offer for sale,
dispense, supply, offer for supply, and transport said product in
compliance with all federal state, and local volatility and other
applicable regulations.
(B) Low Sulfur Diesel - Each party agrees to comply with all federal,
state, and local regulations for low sulfur diesel fuel (including, but not
limited to, 40 C.F.R. 80.29 and 80.30) and hereby certifies and warrants
that any products delivered pursuant to this Agreement complies with the
applicable standards when delivered to the receiving party. Receiving party
agrees to sell, offer for sale, dispense, supply, offer for supply, and
transport in compliance with all said federal, state, and local
regulations.
(C) Reformulated Gasoline - Each party agrees to comply with all federal,
state, and local regulations for reformulated gasoline (including, but not
limited to, 40 C.F.R., Part 80, Subpart D) and hereby certifies and
warrants that any product delivered pursuant to this Agreement complies
with the applicable standards when delivered to the receiving party.
Receiving party agrees to sell, offer to sale, dispense, supply, offer for
supply, and transport in compliance with all said federal, state, and local
regulations.
(D) Additives - Each party agrees to comply with all federal, state, and
local regulations for gasoline additives (including, but not limited to, 40
C.F.R., Part 80, Subpart G) and hereby certifies and warrants that any
product delivered products to this agreement complies with the applicable
standards when delivered to the other party. Receiving party agrees to
sell, offer for sale, dispense, supply, offer for supply, and transport in
compliance with all said federal, state, and local regulations.
23. Indemnity - EACH PARTY TO THIS AGREEMENT SHALL INDEMNIFY, DEFEND, AND HOLD
---------
THE OTHER HARMLESS FROM CLAIMS, DEMANDS, AND CAUSES OF ACTION ASSERTED
AGAINST THE OTHER BY ANY OTHER PERSON (INCLUDING WITHOUT LIMITATION
EMPLOYEES OF EITHER PARTY) FOR PERSONAL INJURY, FOR LESS OF OR DAMAGE TO
PROPERTY, OR FOR ALLEGED VIOLATIONS OF LAW (INCLUDING, BUT NOT LIMITED TO,
THE LAWS REFERENCED IN PARAGRAPHS 19 AND 20, ABOVE) RESULTING FROM THE
WILLFUL OR NEGLIGENT ACTS OR OMISSIONS OF THE INDEMNIFYING PARTY. WHERE
PERSONAL INJURY, DEATH, OR LOSS OF OR DAMAGE TO PROPERTY IS THE RESULT OF
THE JOINT NEGLIGENCE OR MISCONDUCT OF THE PARTIES HERETO. THE PARTIES
EXPRESSLY AGREE TO INDEMNIFY EACH OTHER IN PROPORTION TO THEIR RESPECTIVE
SHARE OF SUCH JOINT NEGLIGENCE OR MISCONDUCT.
24. Claims - Claims as to shortage in quantity or defects in quality shall be
------
made by written notice to the other party within ninety (90) days after the
delivery in questions or shall be deemed to have been waived. NO CLAIMS FOR
SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OF ANY NATURE SHALL BE MADE BY
EITHER PARTY UNDER THIS AGREEMENT.
25. Waiver - No waiver by either party of any breach by the other party of any
------
of the convenants or condition herein contained shall be construed as a
waiver of any succeeding breach of the same or of any other covenant or
condition thereof.
26. Force Majeure and Contingencies - Neither party shall be liable to the
----------------------------------
other for failure or delay in making or accepting deliveries hereunder the
extent that such failure or delay is excused by law or is the result of (1)
action of the elements resulting in failure or delay beyond the reasonable
control of the party, or (2) a disruption or breakdown of production or
transportation facilities beyond the reasonable control of the party, or
(3) any other cause, whether or not of the same class or kind, that is
beyond the reasonable control of such party.
In addition, either party shall be excused from making or accepting
deliveries to the extent making or accepting deliveries is prevented by (1)
compliance, whether voluntary or involuntary, with acts, orders,
<PAGE>
PAGE 7 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
regulations, or requests of any federal, state, or local civilian or
military authority, or any person purporting to act therefore, or (2)
insurrections, wars, rebellions, or riots, or (3) strikes or labor
difficulties, even through the labor difficulty or strike could be settled
by acceding to the demands of a labor group or others. Where mode of
delivery is by or to pipeline the Delivering Party shall also have the same
rights under force majeure as granted to the pipeline carrier by the
relevant tariff, if any.
If, by reason of the causes enumerated above, making or accepting
deliveries under the terms and conditions of this Agreement is curtailed in
part, the prevented party shall allocate the volumes otherwise meeting the
terms of the Agreement that it can deliver or accept in the ordinary course
of business among its suppliers or customers in manner which is fair and
reasonable. The prevented party may include its own requirements and
contractual obligations in allocating any volumes. In the event of such
curtailments, neither party is required to deliver or receive volumes that
do not otherwise meet the terms and conditions of this Agreement in all
respects including, but not limited to, time of delivery and description.
In the even a party is unable to perform hereunder, such party shall
promptly notify that other party in writing of the underlying circumstances
and the expected duration.
27. Business Practices -
-------------------
(A) Each party hereto agrees to comply with all laws and lawful
regulations applicable to any activities carried out in the name of or
on behalf of the other party under the provisions of this Agreement
and/or any amendments to it.
(B) Each party hereto agrees that all financial settlements, billing, and
reports rendered to the other party as provided for in this Agreement
and/or any amendments to it will to the best of its knowledge and
belief reflect properly the facts about all activities and
transactions related to this Agreement, which data may be relied upon
as being complete and accurate in any further recording and reporting
made by such other party for whatever purpose.
(C) Each party hereto agrees to notify the other party promptly upon
discovery of any instance where the notifying party fails to comply
with provision (A) above, or where the notifying party has reason to
believe data covered by (B) above is not longer accurate and complete.
28. Conflict of Interest - Each party, in performing its obligations under this
--------------------
Agreement, shall establish and maintain appropriate business standards,
procedures, and control, including those necessary and avoid any real or
apparent impropriety or adverse impact on the interest of the other party.
Each party shall review with reasonable frequency during the term of this
Agreement such business standards and procedures including, without
limitation, those related to the activities of its employees and agents in
their relations with the other party's employees, agents, and
representatives, and other third parties.
29. Audit - Each party and its duly authorized representatives shall have the
-----
right to witness custody transfer measurement procedures. In addition, each
party and its duly authorized representatives shall access to the
accounting records, laboratory test records, and other documents maintained
by the other party or subcontractors which relate to any performance under
this Agreement, and shall have the right to audit at their own expense such
records at any reasonable time or times during the term of this Agreement
or within three (3) year after the termination of this Agreement. Each
party shall preserve and shall cause all subcontractors to preserve all of
the above referenced documents regarding each delivery for a period of at
least three (3) years after such delivery is made under this Agreement. any
costs (including but not limited to, employee time, office space/overhead,
photocopying pulling records, etc.) incurred by the audited party during
the audit shall be borne by the audited party.
30. Assignment - Neither party shall assign this Agreement without the prior
----------
written consent of the other.
In addition to the above paragraphs (1-30), the following paragraphs (31-34) are
applicable to Natural Gas Liquid agreements only:
<PAGE>
PAGE 8 OF 8
EXXON COMPANY, U.S.A.
GENERAL PROVISIONS
31. Odorization - Unless otherwise provided in the Special Provisions,
-----------
Delivering Party shall odorize with 68cc of ethyl mercaptan per 1,000
gallons any delivery of propane in trucks or tank cars. Receiving party
shall not accept delivery until Receiving Party has ascertained that this
has been done properly.
32. Quality - The product corrected to sixty (60) degrees Fahrenheit delivered
-------
hereunder shall conform to the specifications now prescribed, or later
adopted or revised, for said product by the Gas Processors Association (GPA
Publication 2140, as revised) unless otherwise indicated in the Special
Provision.
33. Storage - If, as a result of the Receiving Party's failure to take
-------
according to schedule, the storage herein provided is exceeded, the
Delivering Party shall not be obligated to change the operation of its
plant but shall have the right to dispose of the product by sale to third
parties; with the sold barrels being deemed delivered under the Agreement
and Receiving Party being credited with the net proceeds of the sale less
8% to cover marketing fees unless otherwise agreed.
34. Demurrange On Tank Cars - Receiving Party shall pay all demurrage charges
-----------------------
direct to the applicable party on all tank cars not loaded and returned to
the railroads within the applicable demurrage-free time.
END OF GENERAL PROVISIONS
<PAGE>
ROLLOVER AND ASSIGNMENT AGREEMENT
THIS ROLLOVER AND ASSIGNMENT AGREEMENT ("Rollover Agreement") is made as of
December 3, 1998 between Penn Octane Corporation, a Delaware corporation having
its principal office at 900 Veterans Boulevard, Suite 510, Redwood City,
California 94063 (the "Borrower") and the six Lenders set forth on Schedule I
----------
hereto (each a "Lender", collectively, the "Lenders").
WHEREAS, pursuant to that certain Purchase Agreement dated October 21, 1997
(the "Purchase Agreement"), the Borrower issued to each Lender a promissory note
(with respect to each Lender, the "Original Note" and collectively, the
"Original Notes") bearing interest at the rate of 10% per annum, dated as of
October 21, 1997 in the aggregate principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000), pursuant to which the Borrower is obligated to
repay to each Lender the stated principal amount of such Lender's Original Note
(which amount is set forth opposite such Lender's name on Schedule I hereto)
----------
plus any accrued and unpaid interest thereon at the rate of 10% per annum (such
amount with respect to each Lender, the "Loan");
WHEREAS, Borrower has represented to Lenders that: an arbitral award was
rendered against International Bank of Commerce-Brownsville ("IBC") in favor of
Borrower; the value of the arbitral award as of July 31, 1998 was approximately
$3.4 million; a judgment was entered on February 28, 1996 by the 197th District
Court of Cameron County, Texas in Civil Action No. 94-08-4008-C, known as
International Energy Development Corp. v. International Bank of
- ----------------------------------------------------------------------
Commerce-Brownsville; such judgment modified the arbitral award in certain
- --------------------
respects; an appeal was taken to the Court of Appeals for the Thirteenth
District of Texas (the "Corpus Christi Court of Appeals"); on June 18, 1998, the
Corpus Christi Court of Appeals rendered an Opinion and Order in No.
13-96-298-CV, known as International Bank of Commerce - Brownsville, Appellant
-------------------------------------------------------
v. International Energy Development Corp., Appellee, such Opinion and Order
- --------------------------------------------------------
confirmed the original arbitral award in all respects; and IBC has filed a
motion for rehearing with the Corpus Christi Court of Appeals;
WHEREAS, the Borrower has requested each of the Lenders to continue to lend
the original principal amount of its respective Loan, and the Borrower intends
to effect the equitable distribution to the Lenders of any payment, realization
or proceeds relating to or arising out of the Judgment (as defined in the
Assignment);
WHEREAS, simultaneously upon the execution of this Rollover Agreement, the
Borrower and the Lenders have executed a Collateral Agreement substantially in
the form attached hereto as Exhibit A, and the Borrower and Castle Energy
----------
Corporation for itself and as Collateral Agent for the Lenders have executed an
Assignment of Judgment Agreement substantially in the form attached hereto as
Exhibit B (respectively, the "Collateral Agreement" and the "Assignment")
- ----------
pursuant to which (i) Castle Energy Corporation has been appointed as Collateral
Agent by the Borrower and Lenders (the "Collateral Agent"), and a collateral
account has been established by the Collateral Agent (the "Collateral Account");
(ii) Borrower has agreed to instruct IBC in writing (as attached as Annex 1 to
the Collateral Agreement, the "Payment Instruction Letter") to make any payment
<PAGE>
of Proceeds (as defined in the Assignment) into the Collateral Account; and
(iii) Borrower has assigned in trust to the Collateral Agent as assignee for
itself and on behalf of all the Lenders all of Borrower's right, title and
interest in and to the Judgment (as defined in the Assignment) and the Proceeds;
and (iv) the Collateral Agent shall distribute any Proceeds paid into the
Collateral Account solely as set forth in the Collateral Agreement;
WHEREAS, each of the Lenders has agreed to continue to lend the original
principal amounts of its respective Loan subject to the terms and conditions of
this Agreement, and to amend and restate its Original Note in consideration for
which the Borrower shall execute and deliver: (i) to the Collateral Agent, the
Assignment, (ii) to each Lender, an amended and restated Original Note (with
respect to each Lender, the "Amended Note", collectively, the "Amended Notes")
substantially in the form of Exhibit C hereto in such principal amount as is set
---------
forth opposite such Lender's name on Schedule I attached hereto, and (iii) to
----------
each Lender, warrants issued by the Borrower to such Lender to purchase shares
of Common Stock, $.01 par value ("Common Stock") of the Borrower at an exercise
price of $1.75 per share, pursuant to Section 2(c) hereof (the "Warrants",
together with the Amended Notes, the "Securities"), substantially in the form of
Exhibit D hereto; and
- ----------
WHEREAS, the Borrower and each of the Lenders desire to enter into a
Registration Rights Agreement with respect to the shares of Common Stock
underlying the Warrants (the "Warrant Shares") and the Conversion Shares (as
defined below), substantially in the form of Exhibit E hereto (the "Registration
---------
Rights Agreement"), all on the terms and conditions set forth therein.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Continuation of Loans. Subject to the terms and conditions stated
----------------------
herein, each Lender hereby agrees to continue to lend the original principal
amount of its respective Loan until the Maturity Date (as defined in this
Agreement).
2. Assignment.
----------
a. In consideration of the Lenders' agreement to continue to lend the
original principal amount of their respective Loans subject to the terms
and conditions stated herein, the Borrower hereby (i) agrees to execute and
deliver to each of the Lenders at the Closing (as defined below) an Amended
Note in such amount as is set forth opposite such Lender's name on Schedule
--------
I hereto and (ii) agrees to execute and deliver to the Collateral Agent at
-
the Closing the Assignment and (iii) agrees to execute and deliver to the
Lenders at the Closing the Collateral Agreement. Borrower hereby
acknowledges that the Assignment and the Collateral Agreement are executed
as collateral security and the execution and delivery thereof shall not in
any way impair or diminish the obligations of Borrower to Lenders. Any
Proceeds paid into the Collateral Account shall be paid in trust to the
2
<PAGE>
Collateral Agent, shall be subject to the liens of the Collateral Agent for
the benefit of itself and the Lenders, and shall be distributed by the
Collateral Agent in accordance with the terms and conditions of the
Collateral Agreement.
b. Borrower hereby agrees to execute and deliver to the Collateral
Agent at the Closing the Payment Instruction Letter, in the form attached
hereto as Annex 1 to the Collateral Agreement which Collateral Agent shall
send to IBC.
c. In further consideration of the Lenders' agreement to continue to
lend the principal amount of their respective Loans subject to the terms
and conditions stated herein, the Borrower shall execute and deliver to
each Lender at the Closing, all Warrants to purchase shares of Common Stock
expiring three years from the date hereof with an exercise price of $1.75
per share, in such numbers as are set forth opposite such Lender's name
on Schedule I hereto.
----------
d. The number of Warrants to be issued to the Lenders at the Closing
pursuant to Section 3(c) is subject to adjustment as set forth in Section 6
of each Warrant.
3. The Closing. The execution and delivery of this Rollover Agreement shall
-----------
take place on December 3, 1998, or at such other date as the Borrower and the
Lenders shall agree (the "Closing").
4. Amendment of the Original Notes. Each Lender hereby agrees that upon
--------------------------------
delivery at the Closing by the Borrower of an Amended Note in such principal
amount set forth opposite such Lender's name on Schedule I hereto, such Lender
----------
shall mark its Original Note "amended and restated"; and, the Original Note
shall be deemed to be amended and restated in its entirety by the Amended Note.
5. Registration Rights. The Lenders shall have such registration rights
--------------------
with respect to the Warrant Shares and the Conversion Shares as are set forth in
the Registration Rights Agreement.
6. Interest Rate; Default Interest Rate; Remedies. The Borrower and each of
----------------------------------------------
the Lenders agree that the Amended Notes shall accrue interest at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31 and June 30,
1999 (or the Maturity Date if earlier). Upon the occurrence of any Event of
Default (as set forth in the Amended Note) under any one of the Amended Notes,
the indebtedness owing under each Amended Note shall become immediately due and
payable in full and shall accrue interest at the rate of twelve percent (12%)
per cent per annum until the entire remaining principal balance of each Amended
Note shall have been paid in full together with all interest accrued thereon;
and the holder of each Amended Note may exercise all of its rights and remedies
under the Rollover Agreement and all other documents executed or delivered in
connection therewith and/or applicable law.
3
<PAGE>
7. Maturity. All outstanding principal of, and accrued and unpaid interest
--------
on, each Amended Note shall be due and payable on the earlier to occur of any
one of the following dates or events (the "Maturity Date"):
a. June 30, 1999;
b. a date determined by the Borrower within ten (10) business days of
the closing date of any raising of debt or equity financing of the
Borrower, resulting in net proceeds to the Borrower in excess of
$2,250,000; or
c. an Event of Default (as defined in the Amended Notes).
7A. Conversion of Indebtedness. Any outstanding principal and/or
----------------------------
accrued and unpaid interest which remains due and payable in respect of any
Amended Notes after June 30, 1999 (with respect to each Amended Note, the
"Overdue Indebtedness") shall, upon the written request (with respect to each
Amended Note, a "Conversion Notice") of the holder of such Amended Notes, be
converted by the Company, in whole but not in part, into such number of
newly-issued shares of Common Stock of the Company (with respect to each Amended
Note, the "Conversion Shares") equal to the quotient of the Overdue Indebtedness
at the time of receipt by the Company of the Conversion Notice divided by $1.50.
The Company hereby agrees to deliver any Conversion Shares to the relevant
holder of an Amended Note as soon as practicable after receipt of a Conversion
Notice and upon surrender of the Amended Note being so converted to the Company
by the holder thereof but in no event later than ten (10) business days after
receipt of the Conversion Notice (the "Issuance Deadline"). Upon the issuance
of the Conversion Shares in respect of an Amended Note, such Amended Note shall,
from the date of receipt by the Company of the Conversion Notice, cease to
accrue any interest, and all of the Company's obligations in respect of such
Amended Note shall be deemed satisfied in full upon the issuance and delivery to
the holder of such Amended Note of the Conversion Shares. In addition, any
Conversion Shares issued pursuant to this Agreement shall be entitled to the
registration rights provided for in the Registration Rights Agreement.
8. Pro Rata Payments. Any payment by the Borrower of any amounts under the
-----------------
Amended Notes shall be made to each Lender pro rata in proportion to the
principal amount outstanding under such Lender's Amended Note over the total
amount outstanding under all the Amended Notes calculated as of the date of
payment. Each payment made by the Borrower relating to the Amended Notes shall
be applied first to accrued and unpaid interest on, and second to outstanding
principal of, the Amended Notes.
9. Representations, Warranties and Covenants of the Borrower. The Borrower
----------------------------------------------------------
represents, warrants and covenants that as of the Closing, and at all times
thereafter until the Amended Notes are paid and satisfied in full:
4
<PAGE>
a. The Borrower is and shall be a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and
has and will have the requisite corporate power and authority to execute
and deliver this Rollover Agreement and to perform its obligations
hereunder.
b. The execution, delivery and performance of this Rollover Agreement
have been and will continue to be duly authorized by all necessary
corporate action on the part of the Borrower and do not violate any
covenant contained in any agreement to which the Borrower is a party.
c. The Warrant Shares and the Conversion Shares, when issued upon
exercise of the Warrants and payment therefor or upon conversion of Amended
Notes, as the case may be, will be legally and validly issued, fully paid
and nonassessable.
d. The Borrower owns all right title and interest in and to the
Judgment and the Proceeds; and except as otherwise set forth in this
Rollover Agreement and the Collateral Agreement, the Borrower has not
created or suffered to exist and will not create or suffer to exist with
respect to the Judgment or the Proceeds any security interest, pledge,
assignment, encumbrance, lien (statutory or otherwise) or other security
agreement or preferential arrangement or transfer of any kind or nature
whatsoever.
e. The Borrower has not received any payment or Proceeds nor realized
all or any part of the Judgment; and if the Borrower hereafter receives any
payment or Proceeds or realizes all or any part of the Judgment, it shall
hold the same in trust for the benefit of the Lenders and deliver the same
to the Collateral Agent in the form received immediately upon the
Borrower's receipt thereof.
f. The Judgment has not been reversed, dismissed, modified or vacated
by any court; and the Borrower will notify the Lenders immediately of any
such reversal, dismissal, modification or vacation.
g. The Borrower will notify the Lenders immediately of any raising of
debt or equity financing that has or potentially may result in proceeds to
the Borrower in excess of $2,250,000, net of transaction expenses related
to such offering and any such excess shall be paid to Lenders, pro rata,
--- ----
immediately upon Borrower's receipt thereof.
5
<PAGE>
10. Representations and Warranties of the Lenders. Each of the Lenders,
-----------------------------------------------
severally and not jointly, represents and warrants to the Borrower, as to
itself, as follows:
a. General:
-------
(i) The Lender has all requisite authority to enter into this
Rollover Agreement and to perform all of the obligations required to
be performed by it hereunder.
(ii) Neither the Borrower nor any person acting on behalf of the
Borrower has offered or sold the Securities to the Lender by means of
any form of general solicitation or general advertising. The Lender
has not received, paid or given, directly or indirectly, any
commission or remuneration for or on account of any sale, or the
solicitation of any sale, of the Securities.
b. Information Concerning the Borrower: Solely for the purpose of this
-----------------------------------
Rollover Agreement and the Warrants, and not for any other purpose
whatsoever:
(i) The Lender is familiar with the business and financial
condition, properties, operations and prospects of the Borrower.
(ii) The Lender has been given full access to all material
information concerning the condition, properties, operations and
prospects of the Borrower. The Lender and its advisors (if any) have
had an opportunity to ask questions of, and to receive information
from, the Borrower and persons acting on its behalf concerning the
terms and conditions of the Lender's investment in the Securities, and
to obtain any additional information necessary to verify the accuracy
of the information and data received by the Lender. The Lender is
satisfied that there is no material information concerning the
condition, properties, operations and prospects of the Borrower of
which the Lender is unaware.
(iii) The Lender has made, either alone or together with its
advisors (if any), such independent investigation of the Borrower, its
management, and related matters as the Lender deems to be, or the
Lender's advisors (if any) have advised to be, necessary or advisable
in connection with this investment; and the Lender and its advisors
(if any) have received all information and data which the Lender and
its advisors (if any) believe to be necessary in order to reach an
informed decision as to the advisability of investing in the
Securities.
(iv) The Lender understands that all the Lender's representations
and warranties contained in this Rollover Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
6
<PAGE>
(v) The Lender understands that acceptance of the Securities
involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Securities, the Warrant
Shares or the Conversion Shares and that resale of the Securities, the
Warrant Shares or the Conversion Shares will be restricted as herein
provided.
c. Status of Lender:
----------------
(i) The Lender either alone or with its advisors (if any) has
such knowledge, skill and experience in business, financial and
investment matters as to be capable of evaluating the merits and risks
of an investment in the Securities. To the extent that the Lender has
deemed it appropriate to do so, the Lender has retained and relied
upon, appropriate professional advice regarding the investment, tax
and legal merits and consequences of this Rollover Agreement and
owning the Securities, the Warrant Shares and the Conversion Shares,
as the case may be.
d. Restrictions on Transfer or Sale:
------------------------------------
(i) The Lender is acquiring the Securities and any Warrant Shares
purchased upon exercise of the Warrants or Conversion Shares upon
conversion of Amended Notes solely for its own account, for investment
purposes, and not with a view to, or for resale in connection with,
any distribution of the Amended Note, the Warrants or such Warrant
Shares or Conversion Shares. The Lender understands that neither the
Amended Note, the Warrants nor such underlying Warrant Shares or
Conversion Shares have been registered under the Securities Act of
1933, as amended (the "Securities Act"), or the securities laws of any
state (collectively referred to as "State Securities Laws") by reason
of specific exemptions under the provisions thereof which depend in
part upon the investment intent of the Lender and on the other
representations made by the Lender in this Rollover Agreement. The
Lender understands that the Borrower is relying upon the
representations and agreements contained in this Rollover Agreement
(and any supplemental information) for the purpose of determining
whether this transaction meets the requirements for such exemptions.
(ii) The Lender understands that the Amended Note, the Warrants
and such underlying Warrant Shares and Conversion Shares are
"restricted securities" under applicable federal securities laws and
that the Securities Act and the rules of the Securities and Exchange
Commission (the "Commission") provide in substance that the Lender may
dispose of such securities or any of them only pursuant to an
effective registration statement under the Securities Act or an
exemption therefrom, and understands that the Borrower has no
obligations or intentions to register any of such securities
thereunder, or to take any other action so as to permit sales pursuant
to the Securities Act, except as set forth in the Registration Rights
Agreement. Accordingly, the Lender understands that under the
Commission's rules, unless disposed of pursuant to an effective
registration statement under the
7
<PAGE>
Securities Act, the Lender may dispose of the Amended Note, Warrants,
underlying Warrant Shares and Conversion Shares only in accordance
with the provisions of Rule 144 under the Securities Act, to the
extent available, or in "private placements" which are exempt from
registration under the Securities Act, or pursuant to such other
exemptions as may be available in which event the transferee will
acquire "restricted securities" subject to the same limitations as in
the hands of the Lender. As a consequence, absent such an effective
registration statement under the Securities Act, the Lender
understands that it may be required to bear the economic risks of the
investment in the Securities (and the underlying Warrant Shares and
Conversion Shares) for an indefinite period of time.
(iii) The Lender agrees that (a) it will not sell, assign,
pledge, give, transfer, of otherwise dispose of the Amended Note, the
Warrants or such underlying Warrant Shares or Conversion Shares or any
interest in any thereof or therein, or make any offer or attempt to do
any of the foregoing, except pursuant to registration of such
securities under the Securities Act and any applicable State
Securities Laws or in a transaction which, in the opinion of counsel
for the Lender satisfactory to the Borrower (which requirement may be
waived by the Borrower upon advice of counsel), is exempt from the
registration provisions of the Securities Act and any applicable State
Securities Laws; (b) the Amended Note and the Warrants and any
certificate(s) representing shares of Common Stock issued upon
exercise of the Warrants may bear a legend making reference to the
foregoing restrictions; and (c) the Borrower and any transfer agent
for shares of its Common Stock shall not be required to give effect to
any purported transfer of any of such securities except upon
compliance with the foregoing restrictions.
(iv) The registration rights granted to the Lender in the
Registration Rights Agreement are not assignable or otherwise
transferrable by the Lender except for assignment to affiliates and/or
subsidiaries of the Lenders. In no event shall any sale, assignment,
pledge or transfer of the Warrants, Warrant Shares or Conversion
Shares by the Lender to a transferee give rise to any rights under the
Registration Rights Agreement except for assignment to affiliates
and/or subsidiaries of the Lenders.
11. Conditions to Obligations of Lender and the Borrower. The obligations
----------------------------------------------------
of each of the Lenders and the Borrower under this Rollover Agreement are
subject to the satisfaction at or prior to the Closing of the following
conditions precedent:
a. The representations and warranties of the Borrower contained in
Section 9 hereof and of each Lender contained in Section 10 hereof shall be
true and correct on and as of the Closing in all respects with the same
effect as though representations and warranties had been made on and as of
the Closing.
8
<PAGE>
b. The Borrower and the Lenders shall have executed and delivered the
Registration Rights Agreement.
c. Each Lender shall have received a duly executed Amended Note in
such principal amount set forth opposite such Lender's name on Schedule I
----------
hereto.
d. The Borrower and the Lenders shall have executed and delivered the
Collateral Agreement.
e. The Borrower and the Collateral Agent shall have executed and
delivered the Assignment.
f. The Borrower shall have executed and delivered to the Lenders with
respect to the Judgment and the Proceeds such documentation as Lenders and
any of their respective legal counsel may require to effect or perfect the
assignment of and security interests in the Judgment, including, without
limitation, UCC-1 Financing Statements.
g. No Event of Default (as defined in the Amended Notes) shall have
occurred.
12. Waiver, Amendment. Neither this Rollover Agreement, the Collateral
------------------
Agreement, the Amended Notes, the Assignment nor any provisions hereof or
thereof shall be modified, changed, discharged or terminated except by an
instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
13. Assignability. Except as otherwise provided in this Rollover Agreement
-------------
and the Collateral Agreement, neither this Rollover Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Borrower or any Lender hereunder without the prior
written consent of the other party, which consent shall not be unreasonably
withheld, except for Assignments to affiliates and/or subsidiaries of Lender.
14. Applicable Law. This Rollover Agreement shall be governed by and
---------------
construed in accordance with the law of the State of New York, regardless of the
law that might be applied under principles of conflicts of law.
15. Submission to Jurisdiction. The Borrower and each Lender hereby
----------------------------
irrevocably agrees that any legal action or proceedings brought against it or
any of its property with respect to this Rollover Agreement or the Amended Notes
may be brought in any state or Federal court located in the City of New York, or
both, and by execution and delivery of this Rollover Agreement each hereby
submits to and accepts with regard to any such action or proceeding, for itself
and in respect of its property, generally and uncon-ditionally, the jurisdiction
of the aforesaid courts. The Borrower and each Lender irrevocably consents to
the service of process in any such action or proceeding by the mailing of copies
9
<PAGE>
thereof by registered or certified airmail, postage prepaid, to the Borrower at
its address set forth in Section 19.
----------
16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE
--------------------
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY UNDER OR IN
CONNECTION WITH THIS ROLLOVER AGREEMENT OR THE AMENDED NOTES.
17. Section and Other Headings. The section and other headings contained in
--------------------------
this Rollover Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Rollover Agreement.
18. Counterparts. This Rollover Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
19. Notices. All notices and other communications provided for herein shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
a. To the Borrower:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
b. If to a Lender, at the address set forth beneath such Lender's name
on Schedule I hereto; or at such other address as any party shall have
-----------
specified by notice in writing to the other parties.
20. Binding Effect. The provisions of this Rollover Agreement shall be
---------------
binding upon and accrue to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns.
21. Severability. Any provision in this Rollover Agreement that is held to
------------
be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as
to that jurisdiction, be ineffective, unenforceable, void or invalid without
affecting the remaining provisions in any other jurisdiction, and to this end
the provisions of this Rollover Agreement are declared to be several.
10
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
PENN OCTANE CORPORATION
By:
----------------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
11
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
CASTLE ENERGY CORPORATION
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
12
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
______________________________________
Clint Norton
SOUTHWEST CONCEPT INC.
By:
---------------------------------
Name:
Title:
13
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
___________________________________________
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By:
---------------------------------
Name:
Title:
14
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By:
--------------------------------
Name:
Title:
15
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Castle Energy Corporation Principal amount of promissory note: $1,000,000
c/o CEC, Inc.
One Radnor Corporate Center Warrants: 225,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher LLP
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
1
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Clint Norton Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 20,250
(972) 931-8509
Southwest Concept Inc. Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 13,500
Attn: Clint Norton
(972) 931-8509
2
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
James F. Meara, Jr. Principal amount of promissory note:
$75,000
8150 N. Central Expressway, #795
Dallas, Texas 75206 Warrants: 16,875
(214) 692-7066
Donaldson Lufkin Jenrette Principal amount of promissory note:
$75,000
Securities Corporation Custodian
SEP FBO James F. Meara IRA Warrants: 16,875
Pershing Division of Donaldson Lufkin &
Jenrette Securities Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
3
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Lincoln Trust Company Principal amount of promissory note: $200,000
FBO Perry D. Snavely IRA
P.O. Box 5831 Warrants: 45,000
Denver, Colorado 80217
Attn: Monique Rice
(610) 260-6388
4
<PAGE>
EXHIBIT A
---------
COLLATERAL AGREEMENT
--------------------
<PAGE>
EXHIBIT B
---------
ASSIGNMENT OF JUDGMENT
----------------------
<PAGE>
DECEMBER 1, 1998 EXHIBIT C
---------
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of _____________________, a
__________________, or its assigns ("Holder"), at the office of the Borrower in
Redwood City, California or such other place as Holder may designate in writing
at least three business days prior to the date fixed for such payment, the
entire principal sum of _____________________($_________), together with
interest thereon, on the earlier of (i) June 30, 1999, (ii) a date determined by
the Borrower within ten (10) business days of the closing date of any raising of
debt or equity financing of the Borrower, resulting in net proceeds to the
Borrower in excess of $2,250,000 or (iii) the occurrence of an Event of Default
hereunder (collectively, the "Maturity Date"), at which time all principal and
any accrued and unpaid interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") dated the date hereof by and among the Borrower and the
Lenders as set forth in Schedule I of the Agreement. All capitalized terms used
----------
herein and not defined shall have the meanings ascribed to them in the Rollover
Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31 and June 30,
1999 (or the Maturity Date, if earlier). Upon the occurrence of an Event of
Default (as defined herein), all amounts owing under this Amended Note shall
become immediately due and payable and interest shall accrue thereon at the
default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $__________ to the holder on December 11,
1998 which sum represents accrued and unpaid interest to December 1, 1998 on the
Original Note (the "Original Note Interest).
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
<PAGE>
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days, provided that such breach is capable of cure.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder hereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
<PAGE>
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
------------------------------
Jerome B. Richter
______________________________________ Chairman, President and
Title: ______________________________ Chief Executive Officer
<PAGE>
EXHIBIT D
---------
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase ______ Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
[Name of Purchaser]
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), _______ shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.75 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
<PAGE>
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the date
---------------------------------------
hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E' = E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively determined
by the Board of Directors of the Company) on the record date
of the assets or debt securities to be distributed divided
by the number of outstanding shares of Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price
<PAGE>
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
------------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
---------------------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated as of December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ___________ shares of Common Stock and hereby makes payment
of $____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
EXHIBIT E
----------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
the Closing Date (as defined herein) by and among Penn Octane Corporation, a
Delaware corporation (the Borrower), and the persons whose signatures appear on
the execution pages of this Agreement.
This Agreement is entered into pursuant to the Rollover Agreement and
Assignment of Judgment between the Borrower and each of the Lenders listed (the
"Rollover Agreement"). In order to induce the Lenders to enter into the
Rollover Agreement, the Borrower has agreed to provide the registration rights
set forth in this Agreement. The execution of this Agreement by the Borrower is
a condition to the closing under the Rollover Agreement.
<PAGE>
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have the respective
meanings set forth in the Agreement. As used in this Agreement, the following
terms shall have the following meanings:
Closing Date: The date on which the Closing occurs pursuant to the
--------------
Rollover Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
Losses: The term "Losses" shall have the meaning set forth in Section 6
------
hereof.
Prospectus: The prospectus included in any Registration Statement
----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
Registrable Securities: All shares of Common Stock issuable upon exercise
------------------------
of the Warrants or conversion of the Amended Notes, plus any Common Stock issued
or issuable to the Lenders in respect of the Warrant Shares and Conversion
Shares, pursuant to any stock split, stock dividend, recapitalization, or
similar event. The Warrants are not Registrable Securities hereunder. As to
any Registrable Securities, such securities shall cease to be Registrable
Securities when (i) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of pursuant to such effective registration
statement, (ii) such securities shall have been distributed pursuant to Rule 144
or any similar provision then in force, under the Securities Act, (iii) such
securities shall have been otherwise transferred, new certificates or other
evidences of ownership for them not bearing a legend restricting further
transfer and not subject to any stop transfer order or other restrictions on
transfer shall have been delivered by the Borrower and subsequent disposition of
<PAGE>
such securities shall not require registration or qualification of such
securities under the Securities Act or any state securities laws then in force
or (iv) the sale of such securities by a Lender shall no longer require
registration under the Securities Act or such securities shall cease to be
outstanding.
Registration Expenses: All reasonable expenses incurred by the Borrower in
---------------------
complying with Section 3 hereof, including all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Borrower, and blue
sky fees and expenses.
Registration Statement: Any registration statement of the Borrower which
------------------------
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference in
such registration statement.
Restricted Securities: The Warrant Shares and the Conversion Shares upon
-----------------------
original issuance thereof, and at all times subsequent thereto, until, in the
case of any such security, it is no longer required to bear the legend set forth
on such security pursuant to the terms of the security, the Rollover Agreement
and applicable law.
Rollover Agreement: The Agreement by and among the Borrower and the
--------------------
Lenders thereunder pursuant to which the Warrants were issued.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
----------
from time to time, or any similar rule or regulation hereafter adopted by the
Commission (excluding Rule 144A).
2. Securities Subject to this Agreement
----------------------------------------
The securities entitled to the benefits of this Agreement are the Registrable
Securities.
3. "Piggy-Back" Registrations.
---------------------------
(a) If at any time the Borrower shall determine to register any of its
Common Stock under the Securities Act, whether in connection with a public
offering by the Borrower, a public offering by shareholders, or both, including,
without limitation, by means of any shelf registration pursuant to Rule 415
under the Securities Act or any similar rule or regulation, but other than a
registration to implement an employee benefit or dividend reinvestment plan, the
Borrower shall promptly give written notice thereof to the Lenders who shall be
registered holders of Registrable Securities and shall use its reasonable
efforts to effect the registration under the Securities Act of such Registrable
Securities as may be requested in a writing delivered to the Borrower within 30
days after such notice by the Lenders as well as to include such Registrable
Securities in any notifications, registrations or qualifications under any state
securities laws which shall be made or obtained with respect to the securities
being registered by the Borrower; provided, however, that (a) any distribution
-------- -------
of Registrable Securities pursu-ant to such registration shall be managed by the
investment banking firm, if any, managing the distribution of the securities
being offered by the Borrower on the same terms as all other securities to be
registered, and (b) the Borrower shall not be required under this Section 3 to
include Registrable Securities in any registration of securities if the Borrower
shall have been advised by the investment banking firm managing the offering of
the securities proposed to be registered by the Borrower or others that the
inclusion of Registrable Securities in such offering would substantially
interfere with the orderly sale of such securities which the Borrower or others
propose to register; provided, however, that in making any determination under
this subparagraph (b) as to the inclusion of the Registrable Securities in any
such offering, Registrable Securities shall be registered on a pro-rata basis
with any other securities as to which the Borrower has granted or may in the
future grant registration rights. All expenses of any registration and offering
of Registrable Securities
2
<PAGE>
pursuant to this Section 3 (including, without limitation, registration fees and
fees and disbursements of the Borrower's counsel) shall be borne by the
Borrower, except that the Borrower shall not bear underwrit-ing discounts or
commissions attributable to Registrable Securities, the fees of any separate
counsel for the holders of Registrable Securities or related transfer taxes.
4. Registration Procedures.
------------------------
(a) In connection with any registration pursuant to Section 3 hereof, the
Borrower will prepare and file with the SEC, a Registration Statement, and any
amendments and supplements thereto, on any form for which the Borrower then
qualifies or which counsel for the Borrower shall deem appropriate, and use its
reasonable efforts to cause such Registration Statement to become effective;
provided that before filing with the SEC a Registration Statement or prospectus
- --------
or any amendments or supplements thereto, the Borrower will (i) furnish to
counsel selected by the Lenders copies of all such documents proposed to be
filed, which documents will be subject to the review of such counsel, and (ii)
notify the Lenders of any stop order issued or threatened by the SEC and take
all reasonable actions required to prevent the entry of such stop order or to
remove it if entered. The Borrower will also (i) promptly notify each Lender of
the effectiveness of such Registration Statement, (ii) furnish to each Lender
such number of copies of such Registration Statement, and each amendment and
supplement thereto, the Prospectus included in such Registration Statement and
such other documents as such Lender may reasonably request; (iii) use its
reasonable efforts to register or qualify such securities to be registered under
such other securities or blue sky laws of such jurisdictions as any Purchaser
reasonably requests; (iv) use its reasonable efforts to cause all such
securities to be registered to be listed on each securities exchange on which
similar securities issued by the Borrower are then listed, and to provide a
transfer agent and registrar for such securities to be registered no later than
the effective date of such Registration Statement; (v) enter in to such
customary agreements (including an underwriting agreement in customary form) and
take all such other actions as the Lenders or the underwriters retained by the
Lenders, if any, reasonably request in order to expedite or facilitate the
disposition of such securities to be registered, including customary
indemnification; and (vi) otherwise use its reasonable efforts to comply with
all applicable rules and regulations of the SEC. The terms of this Section 4
shall not require the Borrower to qualify as a foreign corporation or as a
dealer in securities or to execute or file any general consent to service of
process under the laws of any such jurisdiction where it is not so subject.
(b) In connection with any effective Registration Statement filed pursuant
to this Agreement, the Borrower will immediately notify each Lender
participating in the distribution to which such Registration Statement relates
of the happening of any event as a result of which the prospectus included in
such Registration Statement contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and will promptly prepare and furnish to each such Lender a supplement
or amendment to such prospectus so that such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing. Notwithstanding the foregoing, if
the Borrower determines in its reasonable business judgment that an amendment or
supplement to any such prospectus would interfere with any material financing,
acquisition, corporate reorganization, or other material
3
<PAGE>
corporate transaction or development involving the Borrower, the Borrower may
delay the preparation and filing of such amendment or supplement for a period of
up to 60 days in order to complete or make a public announcement with respect to
such material transaction or development (it being understood that the Borrower
shall be obligated to extend the period of time it is required to maintain in
effect any such Registration Statement to take into account the period of time
that the Lenders are unable to offer or sell Registrable Securities by reason of
this Section 4(c)).
<PAGE>
5. Holdback Agreements.
--------------------
(a) Restrictions on Public Sale by Holders of Registrable Securities. Each
----------------------------------------------------------------
holder of Registrable Securities whose Registrable Securities are covered by a
Registration Statement filed pursuant to Section 3 hereof agrees, if requested
by the managing underwriters in an underwritten offering (to the extent timely
notified in writing by the Borrower or the managing underwriters), not to effect
any public sale or distribution of securities of the Borrower of any class
included in such Registration Statement, including a sale pursuant to Rule 144
(except as part of such underwritten offering), during the 10-day period prior
to, and the 90-day period beginning on, the effective date of any Registration
Statement.
(b) The foregoing provisions shall not apply to any holder of Registrable
Securities if such holder is prevented by applicable statute or regulation from
entering into any such agreement; provided, however, that any such holder shall
-----------------
undertake in its request to participate in any such underwritten offering not to
effect any public sale or distribution of the class of Registrable Securities
covered by such Registration Statement (except as part of such underwritten
offering) during such period unless it has provided five (5) business days prior
written notice of such sale or distribution to the managing underwriter or
underwriters.
6. Indemnification
---------------
(a) Indemnification by Borrower. The Borrower shall indemnify and hold
----------------------------
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act), and the officers, directors, agents or
employees of any such controlling person, from and against all losses, claims,
damages, liabilities, costs (including, without limitation, all reasonable
attorneys' fees) and expenses (collectively, "Losses"), arising out of or based
upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus, or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made (in the case of any Prospectus) not misleading, except insofar as the same
are based solely upon information furnished to the Borrower by such holder for
use therein; provided, however, that the Borrower shall not be liable in any
------------------
such case to the extent that any such Loss arises out of or is based upon an
untrue statement or omission made in any preliminary prospectus or Prospectus if
(i) such holder failed to send or deliver a copy of the Prospectus or Prospectus
supplement with or prior to the delivery of written confirmation of the sale of
Registrable Securities and (ii) the Prospectus or Prospectus supplement would
have corrected such untrue statement or omission.
(b) Indemnification by Holder of Registrable Securities. In connection with
---------------------------------------------------
any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities shall furnish to the
Borrower in writing such information as the Borrower may reasonably
4
<PAGE>
request for use in connection with any Registration Statement or Prospectus.
Each Lender shall indemnify and hold harmless, to the full extent permitted by
law, the Borrower, and its officers, directors, agents and employees, each
person who controls the Borrower (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers, directors,
agents or employees of any such controlling person, from and against all Losses
arising out of or based upon any untrue statement of a material fact contained
in any Registration Statement, Prospectus or preliminary prospectus, or arising
out of or based upon any omission of a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made (in the case of any Prospectus) not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such holder
to the Borrower for use in such Registration Statement, Prospectus or
preliminary prospectus. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Borrower or any
holder and any of their respective directors, officers, agents, employees or
controlling persons (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and shall survive the transfer of such
securities by such holder.
(c) Conduct of Indemnification Proceedings. If any action or proceeding
----------------------------------------
(including any governmental investigation or inquiry) shall be brought or any
claim shall be asserted against any person entitled to indemnity hereunder (an
"indemnified party"), such indemnified party shall promptly notify the party
from which such indemnity is sought (the "indemnifying party") in writing, and
the indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the indemnified party and the
payment of all fees and expenses incurred in connection with the defense
thereof. All such fees and expenses (including any fees and expenses incurred in
connection with investigating or preparing to defend such action or proceeding)
incurred by the indemnified party, shall be paid to the indemnified party, as
incurred, within 20 days of written notice thereof to the indemnifying party;
provided, however, that if, in accordance with this Section 6, the indemnifying
- ------------------
party is not liable to the indemnified party, such fees and expenses shall be
returned promptly to the indemnifying party. Any such indemnified party shall
have the right to employ separate counsel in any such action, claim or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be the expense of such indemnified party unless (a) the
indemnifying party has agreed to pay such fees and expenses, (b) the
indemnifying party shall have failed promptly to assume the defense of such
action, claim or proceeding and to employ counsel reasonably satisfactory to the
indemnified party in any such action, claim or proceeding, or (c) the named
parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
5
<PAGE>
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section 6
------------
from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 6(c), any legal or other fees or expenses reasonably incurred by such
party in connection with any action, suit, claim, investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Borrower shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Borrower shall deliver to such holder a written
statement as to whether the Borrower has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Borrower to register any of its securities under any
section of the Exchange Act.
6
<PAGE>
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any registration are to be
sold in an underwritten offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by
the Borrower. No Lender may participate in any underwritten registration
hereunder unless such Lender (i) agrees to sell such Lender's Registrable
Securities on the basis provided in the underwriting arrangements approved by
the Borrower, and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
9. Miscellaneous
-------------
(a) Amendments and Waivers. The provisions of this Agreement, including the
----------------------
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Borrower obtains the written consent of holders of at least a
majority of the then outstanding Registrable Securities affected by such
amendment, modification or supplement. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect to a matter which
relates exclusively to the rights of holders of Registrable Securities whose
securi-ties are being sold pursuant to a Registration Statement and which does
not directly or indirectly affect the rights of holders of Registrable
Securities whose securities are not being sold pursuant to such Registration
Statement may be given by holders of a majority of the Registrable Securities
being sold by such holders.
(b) Notices. All notices and other communications provided for or permitted
-------
hereunder shall be made in writing by hand-delivery, registered first-class
mail, next day air courier, telex, or telecopy: (i) if to a holder of
Registrable Securities, at the most current address given by such holder to the
Borrower in accordance with the provisions of this Section 9(b), which address
initially is, with respect to each Lender, the address set forth on Schedule I
----------
to the Rollover Agreement; and (ii) if to the Borrower, at 900 Veterans
Boulevard, Suite 240, Redwood City California 94063, attention: Secretary, and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 8(b).
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; two business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being sent by next day air courier; when answered back, if telexed; and when
receipt acknowledged, if telecopied.
(c) Transfer of Registration Rights. The rights granted to the holders
---------------------------------
pursuant to this Agreement to cause the Borrower to register securities may not
be assigned or otherwise transferred in any way other than to an Affiliate of
the holder to whom the holder has transferred all or any part of the Warrant or
the Amended Note.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts by the parties hereto, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
(g) Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
7
<PAGE>
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(h) Entire Agreement. This Agreement is intended by the parties to be a
-----------------
final expression of their agreement and a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties nor
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Borrower with respect to the securities
sold pursuant to the Rollover Agreement. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(i) Attorneys' Fees. If any action or proceeding is brought to enforce any
----------------
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to its costs and expenses and any other available
remedy.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December
1, 1998.
PENN OCTANE CORPORATION
By:
--------------------------------------------------
Jerome B. Richter
Chairman, President and Chief Executive Officer
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December
1, 1998.
CASTLE ENERGY CORPORATION
By:
-----------------------------
Name:
Title:
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December
1, 1998.
-----------------------------
Clint Norton
SOUTHWEST CONCEPT INC.
By:
-----------------------------
Name:
Title:
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December
1, 1998.
-----------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By:
-----------------------------
Name:
Title:
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December
1, 1998.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By:
-----------------------------
Name:
Title:
12
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Castle Energy Corporation Principal amount of promissory note:
$1,000,000
c/o CEC, Inc.
One Radnor Corporate Center Warrants: 225,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
1
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Clint Norton Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 20,250
(972) 931-8509
Southwest Concept Inc. Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 13,500
Attn: Clint Norton
(972) 931-8509
2
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
James F. Meara, Jr. Principal amount of promissory note: $75,000
8150 N. Central Expressway, #795
Dallas, Texas 75206 Warrants: 16,875
(214) 692-7066
Donaldson Lufkin Jenrette Principal amount of promissory note: $75,000
Securities Corporation Custodian
SEP FBO James F. Meara IRA Warrants: 16,875
Pershing Division of Donaldson Lufkin &
Jenrette Securities Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
3
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Lincoln Trust Company Principal amount of promissory note: $200,000
FBO Perry D. Snavely IRA
P.O. Box 5831 Warrants: 45,000
Denver, Colorado 80217
Attn: Monique Rice
(610) 260-6388
4
<PAGE>
EXHIBIT A
---------
COLLATERAL AGREEMENT
--------------------
THIS COLLATERAL AGREEMENT ("Collateral Agreement") is entered into this 1st
day of December 1998, by and among (i) Penn Octane Corporation, a Delaware
corporation, (the "Borrower"); (ii) each of the individual lenders identified on
the signature pages hereto (each a "Lender", and collectively, the "Lenders");
and Castle Energy Corporation, as collateral agent (the "Collateral Agent").
W I T N E S S E T H:
-------------------
WHEREAS, Borrower has represented to Lenders that: an arbitral award was
rendered against International Bank of Commerce-Brownsville ("IBC") in favor of
Borrower; the value of the arbitral award as of July 31, 1998 was approximately
$3.4 million; a judgment was entered on February 28, 1996 by the 197th District
Court of Cameron County, Texas in Civil Action No. 94-08-4008-C, known as
International Energy Development Corp. v. International Bank of
- ----------------------------------------------------------------------
Commerce-Brownsville; such judgment modified the arbitral award in certain
- --------------------
respects; an appeal was taken to the Court of Appeals for the Thirteenth
District of Texas (the "Corpus Christi Court of Appeals"); on June 18, 1998, the
Corpus Christi Court of Appeals rendered an Opinion and Order in No.
13-96-298-CV, known as International Bank of Commerce - Brownsville, Appellant
-------------------------------------------------------
v. International Energy Development Corp., Appellee, such Opinion and Order
- --------------------------------------------------------
confirmed the original arbitral award in all respects; and IBC has filed a
motion for rehearing with the Corps Christi Court of Appeals;
WHEREAS, Borrower has represented to Lenders that International Energy
Development Corp. changed its name to Penn Octane Corporation but the caption of
the Judgment (as defined in the Assignment) continues to reflect the prior name.
WHEREAS, pursuant to a Rollover and Assignment Agreement by and among the
Borrower and the Lenders of even date herewith ("Rollover Agreement") and an
Assignment of Judgment Agreement between Borrower and Castle Energy Corporation
for itself and as Collateral Agent for Lenders dated as of even date herewith
(the "Assignment") the Borrower has assigned in trust to Castle Energy
Corporation for itself and as Collateral Agent for the Lenders all of its right,
title and interest in and to the Judgment and the Proceeds (as defined in the
Assignment);
WHEREAS, in furtherance of the Assignment, the Borrower has agreed to
execute and deliver to Collateral Agent at Closing (as defined in the Rollover
Agreement) a letter to IBC, substantially in the form attached hereto as Annex 1
-------
(the "Payment Instruction Letter") instructing IBC to deliver the Proceeds in
trust to the Collateral Agent for deposit in the Collateral Account (as
hereinafter defined);
WHEREAS, the Borrower and the Lenders wish to appoint the Collateral Agent,
and the Collateral Agent has agreed to establish a deposit account in trust (the
"Collateral Account") and to act, as an administrator of the Collateral Account
upon the terms, conditions and provisions hereinafter set forth; and
<PAGE>
WHEREAS, the Borrower and the Lenders desire to set forth the terms and
conditions pursuant to which the Collateral Agent shall pay out any Proceeds
delivered to the Collateral Agent and/or deposited into the Collateral Account
during the term of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, it is hereby agreed among the parties hereto as follows:
1. Defined Terms
--------------
All capitalized terms used herein, unless otherwise defined herein, shall
have the respective meanings ascribed to them in the Rollover Agreement and are
incorporated herein by reference.
2. Appointment of the Collateral Agent
---------------------------------------
2.1 The Borrower and the Lenders hereby designate the Collateral Agent, and
the Collateral Agent hereby agrees to act, as an administrator of the Collateral
Account in trust, upon the terms and conditions set forth herein.
2.2 The Collateral Agent's duties and responsibilities, in its capacity as
such, shall be limited to those expressly set forth in this Collateral
Agreement, and the Collateral Agent shall not be subject to, nor obliged to
recognize, any other agreement between any or all of the parties hereto even
though reference thereto may be made herein, except to the extent that
definitions contained in the Rollover Agreement are incorporated in this
Collateral Agreement. This Collateral Agreement may not be amended at any time
in such a way as to affect the rights, responsibilities, obligations,
liabilities or fees of the Collateral Agent except with the Collateral Agent's
prior written consent, as evidenced by an instrument in writing signed by all
the parties hereto.
2.3 The Collateral Agent, in its capacity as such, shall disregard any and
all notices or directions given by any of the Borrower, the Lenders or by any
other person, firm or corporation, except (i) such notices, directions and
instructions as are specifically provided for herein, (ii) joint instructions
received in writing from the Borrower and the Lenders and (iii) a Final Order
(as hereinafter defined) of a court of competent jurisdiction. If any property
subject hereto is at any time attached, garnished or levied upon under a Final
Order of a court of competent jurisdiction, or in case the payment, assignment,
transfer, conveyance or delivery of any such property shall be stayed or
enjoined by a Final Order of a court of competent jurisdiction, or in case a
Final Order of a court of competent jurisdiction shall be made or entered
affecting such property or any part thereof, then and in any of such events the
Collateral Agent is authorized to rely upon and comply with any such order,
writ, judgment or decree of any court which is not subject to further review or
appeal (a "Final Order").
2.4 In the event that the Collateral Agent shall be uncertain as to its
duties or actions hereunder, or shall receive instructions from the Borrower or
the Lenders which, in the opinion of the Collateral Agent, are in conflict with
any of the provisions of this Collateral Agreement, it shall be entitled to
maintain the Collateral Account and may decline to take any further action until
the Collateral Agent receives joint written instructions from the Borrower and
the Lenders directing the disbursement of all or any portion of such Collateral
Account, in which case the Collateral Agent shall then make such disbursement in
accordance with such instructions. Should any dispute arise with respect to the
2
<PAGE>
payment, ownership or right of possession of any proposed disbursement, the
Collateral Agent is authorized and directed to retain in its possession, without
liability to anyone, all or any part of such proposed disbursement until such
dispute shall have been settled either by mutual agreement of the parties
concerned or by a Final Order, provided that the Collateral Agent shall be under
no duty whatsoever to institute or defend any such proceedings, and, provided
further, that if any such dispute continues for more than one hundred twenty
(120) days, the Collateral Agent may, in its discretion, upon written notice to
the Borrower and the Lenders, interplead the Collateral Account (or that portion
thereof which is the subject of such dispute) to a court of competent
jurisdiction (subject to the provisions of Section 7.4 hereof).
-----------
2.5 It is understood and agreed that the Collateral Agent shall:
(a) be under no duty to accept notices or instructions from any person
other than as expressly provided for in this Collateral Agreement;
(b) be protected in acting upon any notice, opinion, request,
certificate, approval, consent or other document reasonably believed by it
to be genuine and what it purports to be;
(c) be deemed conclusively to have given and delivered any notice
required to be given or delivered hereunder if the same is in writing,
signed by any one of its authorized officers and (i) mailed, by registered
or certified mail, return receipt requested, postage prepaid, (ii) sent via
expedited courier service that regularly requires signed receipts
evidencing delivery, or (iii) hand delivered, in a sealed wrapper, manually
receipted for by the addressee, in each case to the Borrower or the Lenders
at the addresses set forth in Section 7.3 hereof;
-----------
(d) be protected, indemnified and held harmless jointly and severally
by the Borrower and the Lenders (other than Castle Energy Corporation) from
and against any claim made against it by reason of its acting or failing to
act in connection with any of the transactions contemplated hereby and
against any loss, liability or expense, including attorneys' fees and other
reasonable expenses of defending itself against any claim of liability it
may sustain in carrying out the terms of this Collateral Agreement, except
for claims which are successfully asserted against the Collateral Agent
based upon the Collateral Agent's failure to comply with the terms and
conditions of this Collateral Agreement or the bad faith, gross negligence
or willful misconduct of the Collateral Agent; provided, however, that (i)
promptly after the receipt by the Collateral Agent of notice of any demand
or claim or the commencement of any such action, suit or proceeding, the
Collateral Agent shall notify all parties hereto in writing of the
existence of such demand, claim, action, suit or proceeding; (ii) the other
parties hereto shall be entitled, jointly or severally and at their own
expense, to participate in and assume the defense of any such action, suit
or proceeding; and (iii) the aforesaid indemnity obligations shall survive
the termination of this Collateral Agreement or the resignation of the
Collateral Agent;
(e) have no liability in respect of or duty to inquire into the terms
and conditions of the Rollover Agreement (except to the extent that any of
the defined terms contained in the Rollover Agreement are incorporated in
this Collateral Agreement) or any other document or agreement executed in
connection with or pursuant to the Rollover Agreement, its duties under
this Collateral Agreement being understood by the parties to be ministerial
in nature;
3
<PAGE>
(f) be permitted to consult with counsel of its choice which is
experienced in legal matters of a nature similar to those arising under
this Collateral Agreement, and shall not be liable for any action taken,
suffered or omitted by it in good faith in accordance with the advice of
such counsel; provided, however, that nothing contained in this subsection
(f), nor any action taken by the Collateral Agent or by such counsel, shall
relieve the Collateral Agent from liability for any claims which are
occasioned by its failure to comply with the terms and conditions of this
Collateral Agreement or the bad faith, gross negligence or willful
misconduct of the Collateral Agent, as provided in subparagraph (d) above;
(g) not be bound by any modification, amendment, termination,
cancellation, rescission or supersession of this Collateral Agreement,
unless the same shall be in writing and signed by the Borrower and each of
the Lenders and notice thereof is provided to the Collateral Agent, except
to the extent that any such modification, amendment, termination,
cancellation, rescission or supersession affects the rights,
responsibilities, obligations, liabilities or fees of the Collateral Agent
hereunder, in which case any document or instrument reflecting such changes
shall also be signed by the Collateral Agent;
(h) be entitled to refrain from taking any action other than to keep
the Proceeds received by it in escrow until disbursement thereof pursuant
to Section 4.1 of this Agreement, or it shall be directed otherwise in
writing by the Borrower and the Lenders, or by a Final Order; and
(i) be granted a security interest in and lien on the Collateral
Account for the benefit of itself and the Lenders in its capacity as
Collateral Agent hereunder. This paragraph shall survive notwithstanding
any termination of this Collateral Agreement or the resignation of the
Collateral Agent.
2.6 From time to time on or after the date hereof, the Borrower and the
Lenders shall deliver or cause to be delivered to the Collateral Agent such
further documents and instruments, or cause to be done such further acts, as the
Collateral Agent may request in order to enable the Collateral Agent to carry
out more effectively the provisions and purposes of this Collateral Agreement,
to evidence compliance with this Collateral Agreement or to assure itself that
it is reasonably protected in acting under this Collateral Agreement.
(a) For its services hereunder, the Collateral Agent shall be entitled
to be paid by the Borrower a one-time acceptance fee in an amount equal to
One Dollar ($1.00), payable in advance, commencing with the execution of
this Collateral Agreement.
(b) The foregoing fee, together with the reasonable out-of-pocket
expenses incurred by the Collateral Agent in performing its duties under
this Collateral Agreement, shall be borne by the Borrower. The Borrower
hereby agrees to indemnify and hold the Lenders harmless, from and against
all losses or damages arising out of a breach by the Borrower of its
obligations under this Section 2.7.
------------
3. Establishment of Collateral Account
--------------------------------------
3.1 Simultaneously with the execution of this Collateral Agreement, the
Borrower will deliver to the Collateral Agent Ten Dollars ($10.00) which is to
be deposited into a separate interest bearing deposit account in the name of the
Collateral Agent as the sole signatory (as so constituted and as the amount of
such Collateral Account may increase or be supplemented by any Proceeds or
interest thereon or pursuant to the Payment Instruction Letter or pursuant to
4
<PAGE>
the provisions hereof, the "Collateral Account"). Collateral Agent shall
-------------------
disburse funds from the Collateral Account in accordance with the terms of this
Collateral Agreement. Borrower agrees to execute, deliver and cause to be filed
any and all documents that may be required to evidence, perfect or continue the
perfection of the Collateral Agent's security interest in and lien on the
Collateral Account and the funds therein.
4. Disposition of Collateral Account
------------------------------------
4.1 As promptly as possible after the deposit and clearance of any Proceeds
into the Collateral Account pursuant to the Payment Instruction Letter, the
Collateral Agent shall disburse such Proceeds from the Collateral Account, in
the following amounts and according to the following priority:
(a) First, to the law firm of Patton Boggs, L.L.P. ("Patton Boggs")
for fees and expenses incurred in connection with the Judgment, a
particular amount not to exceed One Million Two Hundred Thousand Dollars
($1,200,000.00) as such particular amount shall be directed by the Borrower
in writing to the Collateral Agent (the "Patton Boggs Payment");
(b) Second, to Thomas A. Serleth, an amount equal to five percent (5%)
of the Judgment net of the Patton Boggs Payment, as such amount shall be
directed by the Borrower in writing to the Collateral Agent;
(c) Third, to Castle Energy Corporation for payment of its legal fees,
costs and expenses (which Borrower hereby agrees to pay) incurred in
connection with the negotiation, preparation, documentation of and/or
exercise of rights under the Rollover Agreement, this Collateral Agreement,
the Assignment, the Amended Notes, the Warrants and the Registration Rights
Agreement provided, however, that the amount so paid in connection with
such negotiation, preparation and/or documentation shall not exceed
$30,000.
(d) Fourth, to each of the Lenders in the respective principal amounts
set forth on Schedule I hereto plus all interest accrued thereon as
provided in each Lender's Amended Note; provided that if the Proceeds are
not sufficient to pay the Loans in full, then pro rata to each of the
--- ----
Lenders based upon the outstanding amount of their respective Loans at the
time of payment;
(e) Fifth, to the Collateral Agent, any amounts owing to the
Collateral Agent pursuant to this Collateral Agreement other than as
specified in subsection (c) above; and
(f) Sixth, to the Borrower, such amount as is remaining in the
Collateral Account after payment in full of each Lender's Amended Note and
amounts owing under Sections 4.1 hereof or as otherwise provided in this
Collateral Agreement (the "Termination Date Escrow Balance").
4.2 The Collateral Agent shall provide written notice pursuant to Section
-------
7.3 hereof to each of the Lenders and the Borrower of the amount, date and payee
- ---
of any distributions to be made hereunder at least ten (10) days before making
any such disbursement pursuant to Section 4.1. For purposes of the ten-day
notice periods pursuant to this Section 4.2, each such period shall commence on
the date of such notice and shall terminate at midnight on the tenth day
thereafter.
5
<PAGE>
4.3 The party or parties receiving a disbursement from the Collateral
Account shall, upon request, furnish to the Collateral Agent concurrently with
its receipt of such disbursement, a signed receipt for the amount of such
disbursement and, if applicable, documentary evidence reasonably satisfactory to
the Collateral Agent of such party's appointment, incumbency and authority.
4.4 For purposes of determining the amount of interest owing to any Lender,
the Collateral Agent shall be entitled to rely on a copy of the Amended Note and
a sworn affidavit signed by the Borrower and such Lender.
5. Lenders' Rights
----------------
The Borrower and each of the Lenders hereby acknowledge that neither this
Collateral Agreement nor the Assignment shall in any way prejudice any of the
Lenders' rights to payment under the Rollover Agreement or the Amended Notes, or
any other amounts owing pursuant to any other agreement, note, or arrangement by
and among any of the Borrower and the Lenders, as the case may be, whatsoever.
The Borrower specifically acknowledges that this Collateral Agreement has been
established for purposes of effecting the equitable distribution of any
Proceeds, and that this Collateral Agreement shall not be construed in any way
as a settlement, compromise or adjustment by any of the Lenders of any amounts
owed to them by the Borrower. The Borrower hereby confirms, and the parties
hereto acknowledge, the Borrower's assignment to the Collateral Agent for the
benefit of itself and the Lenders of all of Borrower's right, title and interest
in and to the Judgment and the Proceeds.
6. Term
----
This Collateral Agreement shall continue until the earlier of (i) the
payment in full of all amounts owing to the Lenders under the Amended Notes, and
(ii) payment into and disbursement out of the Collateral Account, in accordance
with the terms of this Collateral Agreement, of all Proceeds; in each case, as
evidenced by written notice to such effect signed by each of the Lenders in the
form requested by the Collateral Agent; whereupon this Collateral Agreement and
the collateral arrangements created hereunder shall terminate (the "Termination
Date"), and the Collateral Agent shall be released and discharged from all
further duties and obligations hereunder, but without prejudice to any liability
of the Collateral Agent for its failure to comply with the terms and conditions
of this Collateral Agreement or its bad faith, gross negligence or willful
misconduct hereunder. Each of the Lenders agrees that, upon the occurrence of
either of the events specified in clause (i) or (ii) of this Section 6, such
Lender shall execute a written notice in the form requested by the Collateral
Agent.
7. Miscellaneous
-------------
7.1 (a) The Borrower and the Lenders may, upon at least thirty (30) days'
prior written notice to the Collateral Agent executed by all of them,
dismiss the Collateral Agent hereunder and appoint a successor. In such
event, the Collateral Agent shall promptly account for and deliver to the
successor collateral agent named in such notice the then balance of the
Collateral Account. Upon acceptance thereof and of such accounting by such
successor collateral agent, and upon reimbursement to the Collateral Agent
of all expenses due to it hereunder through the date of such accounting and
delivery, the Collateral Agent, in its capacity as such, shall be released
and discharged from all of its duties and obligations hereunder, but
without prejudice to any liability of the Collateral Agent for failure to
comply with the terms and conditions of this Collateral Agreement or its
bad faith, gross negligence or willful misconduct hereunder.
6
<PAGE>
(b) (i) Without limiting the foregoing, the Collateral Agent (and any
successor collateral agent hereunder) shall have the right, as provided in
Subsection (ii) below, at any time to resign as such by delivering the
Collateral Account to any successor collateral agent jointly designated by
the Borrower and all Lenders in writing, or to any court of competent
jurisdiction, whereupon the Collateral Agent shall be discharged of and
from any and all further obligations arising in connection with this
Collateral Agreement, but without prejudice to any liability of the
Collateral Agent for its bad faith, gross negligence or willful misconduct
hereunder.
(ii) The resignation of the Collateral Agent will take effect
upon the appointment of a successor collateral agent by the Borrower and
all Lenders and delivery of the Collateral Account to such successor.
7.2 This Collateral Agreement shall inure to the benefit of, and shall be
binding upon, the parties hereto and their respective successors, heirs,
remaindermen, assigns, executors, administrators, personal representatives,
trustees and fiduciaries. The Collateral Agent shall have the right to rely upon
any proper evidence of the authority of any such successors, heirs,
remaindermen, assigns, executors, administrators, personal representatives,
trustees and fiduciaries. Notwithstanding anything to the contrary herein
contained, no beneficial interest of any person in the Collateral Account shall
be subject to anticipation or assignment by such person, nor shall the
Collateral Account be subject to interference or control of any creditor of such
person, or be taken or reached by any legal or equitable process in satisfaction
of any debt or other liability of such person prior to disbursement, and each
party hereby agrees to indemnify the other parties in connection with any loss
or diminution of such party's interest in the Collateral Account as a result of
any such matter.
7.3 Any notice, direction, instruction or other communication required or
permitted hereunder shall be given in writing by hand delivery, by registered or
certified first class mail, return receipt requested, postage prepaid, or by
expedited courier service that regularly requires signed receipts evidencing
delivery, in each case addressed to the party to receive the same at its
respective address set forth below, or to such other address as such party may
have designated by notice to the others in accordance with the provisions of
this Section 7.3.
------------
7
<PAGE>
(i) To the Borrower:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: John F. Watkins, Esq.
(ii) If to a Lender, at the address set forth beneath such Lender's
name on Schedule I hereto; -----------
(iii) To the Collateral Agent:
Castle Energy Corporation
One Radnor Corp. Center
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
Attn: Joseph Castle, President
or at such other address as any party shall have specified by notice in writing
to the other parties.
Copies of any written communications sent by the Borrower or the Lenders to
the Collateral Agent relating to this Collateral Agreement shall be sent to the
other parties hereto, and copies of any written communications sent by the
Collateral Agent relating to this Collateral Agreement shall be sent to the
Borrower and the Lenders. Notwithstanding the foregoing, the Borrower and the
Lenders shall have the right to engage in direct written communications among
themselves relating to this Collateral Agreement without providing copies
thereof to the Collateral Agent, except to the extent otherwise required under
the terms of this Collateral Agreement.
All notices, directions, instructions and communications hereunder shall be
effective, and deemed given, if hand delivered, on and as of the date of receipt
thereof, as evidenced by a written receipt by or on behalf of the party to which
the same is so delivered, and, if mailed or sent by expedited courier, on and as
of the date of delivery, as evidenced by the acknowledgement of delivery issued
with respect thereto by the applicable postal authorities or by the confirmation
of delivery issued by the applicable courier service.
7.4 (a) The parties agree that this Collateral Agreement, and the
respective rights, duties and obligations of the parties hereunder, shall be
governed by, and interpreted in accordance with, the laws of the State of New
York, without giving effect to principles of conflicts of law thereunder.
8
<PAGE>
(b) Each of the parties hereby (i) irrevocably consents and agrees
that any legal or equitable action or proceeding arising under or in
connection with this Collateral Agreement shall be brought exclusively in
any Federal or state court within the county of New York, New York, and any
court to which an appeal may be taken in any such litigation, and (ii) by
execution and delivery of this Collateral Agreement, irrevocably submits to
and accepts with respect to any such action or proceeding, for such party's
heirs, beneficiaries remaindermen, personal representatives, executors,
administrators, fiduciaries and permitted assigns and in respect of such
party's properties and assets, generally and unconditionally, the
jurisdiction of the aforesaid courts, and irrevocably waives any and all
rights such party may now or hereafter have to object to such jurisdiction
under the constitution or laws of the State of New York or the Constitution
or laws of the United States of America or otherwise. Each of the parties
hereby irrevocably waives any right it may have to a jury trial in
connection with this Collateral Agreement.
7.5 This Collateral Agreement, and any notice, direction or other document
or instrument delivered in connection herewith, may be executed in counterparts,
each of which shall constitute an original instrument, but all of which together
shall constitute a single agreement, notice, direction, document or instrument
as the case may be. The Borrower and each of the Lenders agree to cooperate with
each other in good faith in joining in any notices or written instructions that
are required to be delivered to the Collateral Agent jointly by the Borrower and
the Lenders.
7.6 The provisions of this Collateral Agreement shall not be altered or
terminated by operation of law or by the occurrence of any event (except as
otherwise specified herein), including, without limitation, the death or
incapacity or the termination of the legal existence of any party hereto.
7.7 This Collateral Agreement shall not be assignable, in whole or in part,
by any party without the prior written consent of the other parties, and any
attempted assignment without such prior written consent shall be void except
that each Lender may assign its rights under this Collateral Agreement to any of
its affiliates or subsidiaries without the consent of any other party.
7.8 This Collateral Agreement, and any notice, direction or other document
or instrument delivered in connection herewith, may be executed in counterparts,
each of which shall constitute an original instrument, but all of which together
shall constitute a single agreement, notice, direction, document or instrument,
as the case may be.
7.9 This Collateral Agreement may not be amended or modified nor any
provision hereof waived except by an instrument in writing signed by the party
against whom any amendment or modification or waiver is sought to be enforced.
7.10 Any provision in this Collateral Agreement held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions of this Collateral Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
THE BORROWER:
PENN OCTANE CORPORATION
By:
-----------------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
CASTLE ENERGY CORPORATION,
as Collateral Agent
By: _____________________________
Name:
Title:
10
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
______________________________________
Clint Norton
SOUTHWEST CONCEPT INC.,
as Lender
By: ______________________________________
Name:
Title:
CASTLE ENERGY CORPORATION,
as Lender
By: _____________________________________
Name:
Title:
11
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
___________________________________________
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA,
as Lender
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: ________________________________
Name:
Title:
12
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA,
as Lender
By:__________________________________
Name:
Title:
13
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Castle Energy Corporation Principal amount of Amended Note: $1,000,000
c/o CEC, Inc. Accrued interest thereon at 10% per annum
One Radnor Corporate Center prior to an Event of Default, and 12% per annum
100 Matsonford Road, Suite 250 subsequent to an Event of Default
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher LLP
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
1
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Clint Norton Principal amount of Amended Note: $90,000
1710 Dallas Parkway, Suite 120 Accrued interest thereon at 10% per annum
Dallas, Texas 75248 prior to an Event of Default, and 12% per annum
(972) 931-8509 subsequent to an Event of Default
Southwest Concept Inc. Principal amount of Amended Note: $60,000
17110 Dallas Parkway, Suite 120 Accrued interest thereon at 10% per annum
Dallas, Texas 75248 prior to an Event of Default, and 12% per annum
Attn: Clint Norton subsequent to an Event of Default
(972) 931-8509
2
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
James F. Meara, Jr. Principal amount of Amended Note: $75,000
8150 N. Central Expressway,#795 Accrued interest thereon at 10% per annum
Dallas, Texas 75206 prior to an Event of Default, and 12% per
annum
(214) 692-7066 subsequent to an Event of Default
Donaldson Lufkin Jenrette Principal amount of Amended Note: $75,000
Securities Corporation Custodian Accrued interest thereon at 10% per annum
SEP FBO James F. Meara IRA prior to an Event of Default, and 12% per
annum
Pershing Division of Donaldson subsequent to an Event of Default
Lufkin & Jenrette Securities
Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
3
<PAGE>
SCHEDULE I
Lenders and Addresses
- -----------------------
Lincoln Trust Company Principal amount of Amended Note: $200,000
FBO Perry D. Snavely IRA Accrued interest thereon at 10% per annum
P.O. Box 5831 prior to an Event of Default, and 12% per annum
Denver, Colorado 80217 subsequent to an Event of Default
Attn: Monique Rice
(610) 260-6388
4
<PAGE>
ANNEX 1
-------
PAYMENT INSTRUCTION LETTER
[Penn Octane Corporation letterhead]
December 1, 1998
International Bank of Commerce-Brownsville
630 East Elizabeth Street
Brownsville, Texas 78520
Re: Payment Instructions
---------------------
Ladies and Gentlemen:
We refer you to the judgment confirming the arbitral award for $3,246,754
entered against the International Bank of Commerce-Brownsville in favor of the
Penn Octane Corporation (the "Company") on February 28, 1996 by the 197th
District Court in and for Cameron County, Texas, which judgment was upheld by
the Texas Court of Appeals on June 18, 1998, (the "Judgment").
We note that IBC-Brownsville has filed for a rehearing of the case
underlying the Judgment by the Texas Court of Appeals, and that as of the date
set forth above, the Texas Court of Appeals has not ruled on the IBC-Brownsville
request for rehearing.
The Company hereby notifies IBC-Brownsville that the Company has assigned
the Judgment and the proceeds thereof to Castle Energy Corporation ("CEC") for
itself and on behalf of certain other lenders as more particularly described in
the enclosed Assignment of Judgment.
In the event the Judgment becomes final and non-appealable, or is otherwise
settled by the Company and IBC-Brownsville, IBC-Brownsville is hereby instructed
to remit by wire transfer any and all proceeds of the Judgment or from such
settlement, as the case may be, in immediately available funds to the account of
CEC set forth below:
<PAGE>
Account Number: 8612486589
ABA Number: 031000053
Bank: PNC Bank
Contact: Mary Wagner
Phone: (215) 575-6428
If you have any questions regarding this matter, please contact Ian T.
Bothwell, Chief Financial Officer and Treasurer, Penn Octane Corporation, at
(562) 929-6789 ext. 101.
PENN OCTANE CORPORATION
By:_______________________
Name:
Title:
<PAGE>
ASSIGNMENT OF JUDGMENT AGREEMENT
This LITIGATION CLAIMS ASSIGNMENT AGREEMENT ("Assignment") is made as of
December 1, 1998 by and between PENN OCTANE CORPORATION, a Delaware corporation
(formerly known as "International Energy Development Corp.", and herein called
"Assignor") and CASTLE ENERGY CORPORATION, as assignee for itself and as
Collateral Agent ("Collateral Agent") for the Lenders listed on Schedule I
hereto ("Lenders").
WHEREAS, Assignor, and Lenders have entered into that certain Rollover and
Assignment Agreement dated as of December 1, 1998 (as the same may be further
amended from time to time, the "Rollover Agreement");
WHEREAS, Assignor, Collateral Agent, and the Lenders have entered into that
certain Collateral Agreement dated as of December 1, 1998 (as the same may be
amended from time to time, the "Collateral Agreement");
WHEREAS, Assignor has represented to Collateral Agent and the Creditors
that: an arbitral award was rendered against International Bank of
Commerce-Brownsville ("IBC") in favor of Assignor; the value of the arbitral
award as of July 31, 1998 was approximately $3.4 million; a judgment was entered
on February 28, 1996 by the 197th Judicial District Court of Cameron County,
Texas, in Civil Action No. 94-08-4008-C, known as International Energy
---------------------
Development Corp. v. International Bank of Commerce - Brownsville; such judgment
- -----------------------------------------------------------------
modified the arbitral award in certain respects; an appeal was taken to the
Court of Appeals for the Thirteen District of Texas (the "Corpus Christi Court
of Appeals"); on June 18, 1998, the Corpus Christi Court of Appeals rendered an
Opinion and Order in No. 13-96-298-CV, known as International Bank of Commerce -
--------------------------------
Brownsville, Appellant v. International Energy Development Corp., Appellee; such
- --------------------------------------------------------------------------
Opinion and Order confirmed the original arbitral award in all respects; and IBC
has filed a motion for rehearing with the Corpus Christi Court of Appeals.
WHEREAS, by this Assignment, the respective parties to the Rollover
Agreement and the Collateral Agreement wish to provide, among other things, for
the assignment and recordation of the Judgment (as hereinafter defined)
pursuant to Section 12.014 of the Texas Property Code.
NOW, THEREFORE, in consideration of the premises and other value, the
receipt and sufficiency of which are hereby acknowledged, Assignor and
Collateral Agent for itself and the Lenders do hereby agree as follows:
1. To secure the Loans and all other obligations of Assignor under the
Rollover Agreement, the Amended Notes (as defined in the Rollover Agreement),
the Collateral Agreement, this Assignment and all documents executed or
delivered by Assignor in connection therewith (collectively, the "Obligations"),
Assignor hereby unconditionally and irrevocably assigns, transfers, conveys and
<PAGE>
sets over to Collateral Agent for the benefit of itself and all Lenders, and
grants a security interest in and lien on, all of Assignor's right, title and
interest in and to: (a) that certain arbitral award ("Arbitral Award") in favor
of International Energy Development Corp. against IBC; the judgment known as
International Energy Development Corp. v. International Bank of Commerce -
- --------------------------------------------------------------------------------
Brownsville, entered on February 28, 1996 by the 197th Judicial District Court
- -----------
of Cameron County, Texas, Civil Action No. 94-08-4008-C (the "District Court
Decision"); that certain Opinion and Order known as International Bank of
---------------------
Commerce - Brownsville, Appellant v. International Energy Development Corp.,
- --------------------------------------------------------------------------------
Appellee, Court of Appeals for Thirteenth District of Texas Corpus Christi, No.
- --------
13-96-298-CV, entered on June 18, 1998 ("Appellate Decision"; the Arbitral
Award, the District Court Decision, the Appellate Decision and any other order
related thereto or any appeal therefrom or modification thereof are collectively
referred to herein as, the "Judgment"); and (b) any and all appeal bond,
collateral, payment, realization or proceeds relating to or arising out of the
Judgment, any appeal thereof or any settlement with respect thereto, including,
without limitation, all damages, statutory damages or penalties, exemplary or
punitive damages, attorneys' fees, costs and pre-judgment and post-judgment
interest (all of the foregoing being collectively referred to herein as, the
"Proceeds"). Collateral Agent on behalf of itself and the Lenders shall be
entitled to the Proceeds subject to the terms and conditions set forth in the
Collateral Agreement until the Obligations are paid in full and the Rollover
Agreement is terminated.
2. Assignor represents and warrants that it owns all right, title and
interest in and to the Judgment, and the Proceeds, free and clear of all liens,
claims and encumbrances except as granted pursuant to the Rollover Agreement,
the Collateral Agreement and this Assignment. Assignor further represents and
warrants that it is the same entity as the plaintiff named in the Judgment,
having changed its name from International Energy Development Corp. to Penn
Octane Corporation.
3. Assignor agrees that in the event it receives any of the Proceeds,
it shall set aside and hold in trust for Collateral Agent all such Proceeds, and
pay such Proceeds to Collateral Agent subject to the Collateral Agreement
immediately upon receipt thereof by Assignor.
4. For the purpose of carrying out the terms of this Assignment,
Assignor hereby irrevocably constitutes and appoints Collateral Agent and any
officer or agent thereof, with full power of substitution, as its
attorney-in-fact with full irrevocable power and authority in the place and
stead of Assignor and in the name of Assignor or in its own name, from time to
time in Collateral Agent's sole discretion, without notice to or assent by
Assignor, to do the following on behalf of Assignor:
(i) to direct any party liable for any payment under the Judgment
(including any entity that has posted a bond related thereto) to make payment of
any and all Proceeds directly to Collateral Agent subject to the Collateral
Agreement;
2
<PAGE>
(ii) to ask, demand, collect, receive and give acquittances and
receipts for any and all Proceeds (each of which acquittances and receipts shall
be a full and complete release, discharge and acquittance to the extent of any
amount paid to Collateral Agent) and, in the name of Assignor or its own name or
otherwise, to take possession of and endorse and collect any checks, drafts,
notes, acceptances or other instruments for the payment of Proceeds; and
This power of attorney is a power coupled with an interest and shall be
irrevocable until the discharge by the Assignor of all the Obligations owing to
the Collateral Agent and the Lenders including, without limitation, payment in
full of the indebtedness of Assignor to Collateral Agent and the Lenders.
The parties hereto acknowledge and agree that Collateral Agent shall not be
entitled to compromise, settle, or otherwise affect the Judgment or to
participate in or control any appeal, settlement, or prosecution of the
Judgment.
5. If any Event of Default (as such term is defined in any Amended Note
or used in the Rollover Agreement) shall have occurred and be continuing,
Collateral Agent shall have, in addition to all other rights granted to it in
the Rollover Agreement, the Amended Notes, this Assignment, or in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights of a secured party under applicable law as if (and whether or not) the
Judgment and/or the Proceeds are collateral subject to Chapter 9 of the Texas
Business and Commerce Code.
6. This Assignment shall be binding upon and inure to the benefit of
Assignor, Collateral Agent and the Lenders and their respective successors and
assigns.
7. This Assignment shall be governed by and construed in accordance
with the laws of the State of Texas other than the conflicts of laws rules
thereof.
8. If any provision of this Assignment shall for any reason be held to
be invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other provision of such document, and such
invalid, illegal or unenforceable provision shall be interpreted in such a
manner to render it valid, legal and enforceable and to most nearly achieve the
intents and purposes hereof.
9. Each party hereto agrees to promptly execute and deliver to the
other party hereto any and all further or additional instruments and documents
including, without limitation, Uniform Commercial Code-1 financing statements,
and take such further action as such other party may reasonably request in order
to fully effect the purposes of this Assignment. The provisions of this
Assignment shall continue in full force and effect notwithstanding any
commencement of a case under the federal bankruptcy code. Neither this
Assignment nor any of the terms hereof may be amended, waived, discharged,
modified or terminated in any respect unless such amendment, waiver, discharge,
modification, or termination is by an instrument in writing signed by each party
hereto.
3
<PAGE>
10. All notices, consents, approvals, or other communications required
or permitted to be given pursuant hereto shall be in writing and shall either
(i) be mailed by first-class United States mail, postage prepaid, registered or
certified with return receipt requested, (ii) delivered in person to the
intended addressee, (iii) sent by telecopy, or (iv) sent by express mail (such
as Federal Express or United States Express Mail). Notice mailed pursuant to
alternative (i) shall be effective three days after its deposit in the United
States mail. Notice given in any other manner shall be effective only on the
date actually received by the addressee. For purposes of notice, the addresses
of the parties shall be as follows:
To Assignor: Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter, President
With a copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: John F. Watkins, Esquire
To Collateral Agent: Castle Energy Corporation
c/o CEC, Inc.
One Radnor Corporate Center
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
Attn: Mr. Joseph Castle
With a copy to: Duane, Morris & Heckscher, L.L.P.
One Liberty Place
Philadelphia, Pennsylvania 19103-7396
Attn: Margery N. Reed, Esquire
Each party shall have the right to change its address for notice to any other
location by the giving of 10 days' notice to the other party in the manner set
forth in this Paragraph.
11. Assignor may not assign, encumber or transfer, voluntarily or by
operation of law, its interest in the Judgment or the Proceeds without the prior
written consent of Collateral Agent, and any attempt to do so shall be void.
12. This Assignment may be executed in any number of counterparts, each
of which shall be deemed an original and all of which shall constitute one and
the same instrument.
4
<PAGE>
13. Assignor hereby acknowledges and agrees that this Assignment may be
recorded in accordance with Texas Property Code Section 12.014, and Collateral
Agent and the Lenders shall be entitled to all of the benefits of such statute.
IN WITNESS WHEREOF, this Assignment is executed as of the date first above
mentioned.
PENN OCTANE CORPORATION
(formerly International Energy Development Corp.)
By:
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
CASTLE ENERGY CORPORATION
for itself and as Collateral Agent for the Lenders
By:
Name: Joseph Castle
Title: Chairman and Chief Executive Officer
5
<PAGE>
SCHEDULE I
LIST OF LENDERS
1. Castle Energy Corporation
2. Clint Norton
3. Southwest Concept Inc.
4. James F. Meara, Jr.
5. Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA
6. Lincoln Trust Company FBO Perry D. Snavely IRA
6
<PAGE>
THE STATE OF TEXAS :
:
COUNTY OF DALLAS :
This instrument was acknowledged before me on November, 1998 by Jerome B.
Richter, Chairman of the Board, President and Chief Executive Officer of Penn
Octane Corporation, Incorporated, a Delaware corporation (formerly International
Energy Development Corp.), on behalf of said corporation.
Notary Public in and for the
State of Texas
My Commission Expires:
______________
7
<PAGE>
THE STATE OF TEXAS :
:
COUNTY OF DALLAS :
This instrument was acknowledged before me on November, 1998, by Joseph
Castle, Chairman of the Board and President of Castle Energy Corporation, a
Delaware corporation, on behalf of said corporation.
Notary Public in and for the
Commonwealth of Pennsylvania
My Commission Expires:
______________
8
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of CASTLE ENERGY CORPORATION, or its
assigns ("Holder"), at the office of the Borrower in Redwood City, California or
such other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of ONE
MILLION DOLLARS ($1,000,000), together with interest thereon, on the earlier of
(i) June 30, 1999, (ii) a date determined by the Borrower within ten (10)
business days of the closing date of any raising of debt or equity financing of
the Borrower, resulting in net proceeds to the Borrower in excess of $2,250,000
or (iii) the occurrence of an Event of Default hereunder (collectively, the
"Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $41,917.81 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest to December 1, 1998 on
the Original Note (the "Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
<PAGE>
terms of any indebtedness of the Borrower for borrowed money in excess of
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of the Borrower to cure such breach within a period of
fifteen (15) days.
If any pament owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
________________________________________ Chairman, President and
Title: ________________________________ Chief Executive Officer
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 225,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Castle Energy Corporation
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 150,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.75 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the date
---------------------------------------
hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'=E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event covered
-------------------------------
by this Section 6 shall require that an adjustment in the Exercise Price be made
effective as of a record date, the Company may elect to defer making such
adjustment until the occurrence of such event. If the Company so defers making
any such adjustment and if this Warrant is exercised after such record date but
before the occurrence of such event, the shares of Common Stock and other
capital stock of the Company, if any, issuable upon such exercise, had such
adjustment been made as of the record date, over and above the shares of Common
Stock or other capital stock of the Company, if any, issuable upon such exercise
on the basis of the Exercise Price as unadjusted, shall be issued promptly upon
the occurrence of such event and the Company shall pay to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a change in
---------------------------
the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number of
-------------------------
shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be made
---------------------------------------
under any Section herein in connection with the issuance of Warrant Stock upon
exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
----------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7 hereof,
---------------------
shares issuable upon exercise or exchange hereof shall include only shares of
the class designated as Common Stock of the Company as of the date hereof or
shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
-----------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of CLINT NORTON, or his assigns
("Holder"), at the office of the Borrower in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of NINETY
THOUSAND DOLLARS ($90,000), together with interest thereon, on the earlier of
(i) June 30, 1999, (ii) a date determined by the Borrower within ten (10)
business days of the closing date of any raising of debt or equity financing of
the Borrower, resulting in net proceeds to the Borrower in excess of $2,250,000
or (iii) the occurrence of an Event of Default hereunder (collectively, the
"Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $3,772.60 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest to December 1, 1998 on
the Original Note ("Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
<PAGE>
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
________________________________________ Chairman, President and
Title: ________________________________ Chief Executive Officer
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 20,250 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Clint Norton
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 13,500 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $1.75 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the date
---------------------------------------
hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'=E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
-----------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of SOUTHWEST CONCEPT INC., or its
assigns ("Holder"), at the office of the Borrower in Redwood City, California or
such other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of SIXTY
THOUSAND DOLLARS ($60,000), together with interest thereon, on the earlier of
(i) June 30, 1999, (ii) a date determined by the Borrower within ten (10)
business days of the closing date of any raising of debt or equity financing of
the Borrower, resulting in net proceeds to the Borrower in excess of $2,250,000
or (iii) the occurrence of an Event of Default hereunder (collectively, the
"Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $2,515.07 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest to December 1, 1998 on
the Original Note (the "Original Note Interest").
All payments shall be payable in lawful money of the United States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
<PAGE>
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
-------------------------------- Chairman, President and
Title: Chief Executive Officer
--------------------------------
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 13,500 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Southwest Concept Inc.
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 9,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $1.75 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
----------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-----------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'=E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
-----------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of JAMES F. MEARA, JR., or his assigns
("Holder"), at the office of the Borrower in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of SEVENTY
FIVE THOUSAND DOLLARS ($75,000), together with interest thereon, on the earlier
of (i) June 30, 1999, (ii) a date determined by the Borrower within ten (10)
business days of the closing date of any raising of debt or equity financing of
the Borrower, resulting in net proceeds to the Borrower in excess of $2,250,000
or (iii) the occurrence of an Event of Default hereunder (collectively, the
"Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $3,143.84 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest on the Original Note (the
"Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
<PAGE>
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
-------------------------------- Chairman, President and
Title: Chief Executive Officer
--------------------------------
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 16,875 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
James F. Meara, Jr.
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 11,250 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $1.75 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
----------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-----------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'=E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
-----------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of DONALDSON LUFKIN JENRETTE
SECURITIES CORPORATION CUSTODIAN SEP FBO JAMES F. MEARA IRA, or its assigns
("Holder"), at the office of the Borrower in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of SEVENTY
FIVE THOUSAND DOLLARS ($75,000), together with interest thereon, on the earlier
of (i) June 30, 1999, (ii) a date determined by the Borrower within ten (10)
business days of the closing date of any raising of debt or equity financing of
the Borrower, resulting in net proceeds to the Borrower in excess of $2,250,000
or (iii) the occurrence of an Event of Default hereunder (collectively, the
"Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $3,143.84 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest to December 1, 1998 on
the Original Note (the "Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
<PAGE>
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
-------------------------------- Chairman, President and
Title: Chief Executive Officer
--------------------------------
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 16,875 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 11,250 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $1.75 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
----------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-----------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
------------------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
DECEMBER 1, 1998
AMENDED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of LINCOLN TRUST COMPANY, or its
assigns ("Holder"), at the office of the Borrower in Redwood City, California or
such other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of TWO
HUNDRED THOUSAND DOLLARS ($200,000), together with interest thereon, on the
earlier of (i) June 30, 1999, (ii) a date determined by the Borrower within ten
(10) business days of the closing date of any raising of debt or equity
financing of the Borrower, resulting in net proceeds to the Borrower in excess
of $2,250,000 or (iii) the occurrence of an Event of Default hereunder
(collectively, the "Maturity Date"), at which time all principal and any accrued
and unpaid interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of that
certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
- -----------
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31, 1999 and
June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence of an
Event of Default (as defined herein), all amounts owing under this Amended Note
shall become immediately due and payable and interest shall accrue thereon at
the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this
Amended Note may be enforced by suit or other process of law. This Amended Note
may be prepaid at any time prior to maturity without penalty in an amount equal
to the principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $8,383.56 to the Holder on December 11,
1998, which sum represents accrued and unpaid interest to December 1, 1998 on
the Original Note (the "Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
The Borrower shall be in default hereunder upon the occurrence of any of
the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
<PAGE>
or insolvency proceeding or the entry of a decree or order by a court of
competent jurisdiction adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note is not paid when due, whether
at maturity or by acceleration or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all costs, attorneys' fees and expenses incurred by Holder hereof in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving Borrower, or involving any endorser or guarantor hereof,
which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30, 1999,
the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Amended Note and all notices of every kind are hereby waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the exercise of any right or remedy
shall operate as a waiver thereto, and no single or partial exercise by Holder
of any right or remedy shall preclude the further exercise thereof or the
exercise of any other right or remedy.
Any provision in this Amended Note that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid without affecting
the remaining provisions in any other jurisdiction, and to this end the
provisions of this Amended Note are declared to be severable.
This Amended Note shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to such state's
conflicts of law provisions. Each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts located in the State
of New York, County of New York.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the date first above written.
PENN OCTANE CORPORATION
Attest: By:
-------------------------
Jerome B. Richter
- ---------------------------------------- Chairman, President and
Title: Chief Executive Officer
----------------------------------
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 30, 2001
Warrant to Purchase 45,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Lincoln Trust Company
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November 30, 2001 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 30,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $1.75 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this
<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
----------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 12 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
<PAGE>
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
----------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, the number of
shares of capital stock of the Company which the Holder would have owned
immediately following such action if the Holder had exercised or exchanged the
Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the date
-----------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E'=E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
<PAGE>
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares of
Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
--------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
-----------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No Adjustment for Small Amounts. Anything herein to the contrary
---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
<PAGE>
(h) Common Stock Defined. Subject to the provisions of Section 7
----------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification or
reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the event
----------------------------------------------------------
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company (other than a subdivision or combination
of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease, transfer or conveyance to another corporation of the property
and assets of the Company as an entirety or substantially as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter, by
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been received upon exercise or exchange of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable
<PAGE>
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations and
demands to or upon the Company in respect of this Warrant may be made and will
give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that the average trading price of the Company's
Common Stock, as reported on the NASDAQ SmallCap Market or such other exchange
on which the Company's Common Stock may then be quoted, exceeds $10.00 for a
period of twenty (20) consecutive trading days, upon not less than thirty (30)
days' notice in writing to the Holder, repurchase all or any portion of this
Warrant at a purchase price equal to $.10 per share of Common Stock covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is adjusted pursuant to Section 6 hereof. During such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
11. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
<PAGE>
15. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
-----------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated: December 1, 1998
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ________ shares of Common Stock and hereby makes payment of
$____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
[DRAFT 11/12/98]
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of November __, 1998, by
and between Van Moer Santerre and Company, a Luxembourg company (the
"Purchaser") and Penn Octane Corporation, a Delaware corporation (the
"Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 250,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock"), and (ii) a warrant, exercisable until November 13,
2000 at $1.25 per share of Common Stock (subject to adjustment), to purchase
125,000 shares (the "Warrant Shares") of Common Stock substantially in the form
of Exhibit 1 hereto (the "Warrant"; the Shares and the Warrant being herein
collectively referred to as the "Securities"); and
WHEREAS, the Company and the Purchaser desire to enter into a Registration
Rights Agreement with respect to the Shares and the Warrant Shares,
substantially in the form annexed as Exhibit 2 hereto (the "Registration Rights
Agreement"), all on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the agreements and obligations herein
contained, the Purchaser and the Company hereby agree as follows:
1. Purchase and Sale of the Securities. Subject to the terms and conditions
-----------------------------------
set forth in this Agreement, the Company agrees to sell to the Purchaser, and
the Purchaser agrees to purchase from the Company, the Securities for a purchase
price equal to Two Hundred Fifty Thousand ($250,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale of the
-----------
Securities shall take place on November 13, 1998 at 10:00 A.M. local time at the
offices of the Company in Redwood City, California, or at such other time and
place as the Company and the Purchaser shall agree. At the Closing, the
Purchaser shall deliver to the Company payment for the Securities being
purchased in immediately available funds and the Company shall deliver the
Shares and the Warrant to the Purchaser.
3. Registration Rights. The Purchaser shall have such registration rights
--------------------
with respect to the Share and the Warrant Shares as are set forth in the
Registration Rights Agreement.
4. Representations and Warranties of the Company, As of the Closing, the
---------------------------------------------
Company represents and warrants that:
(a) the Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has the
requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
(b) the execution, delivery and performance of this Agreement, and the
sale and delivery of the Securities have been duly authorized by all
necessary corporate action on the part of the Company and do not violate
any covenant contained in any agreement to which the Company is a party;
and
(c) the Warrant Shares, when issued upon exercise of the Warrant and
payment therefor, will be legally and validly issued, fully paid and
nonassessable.
5. Representations and Warranties of the Purchaser. The Purchaser
----------------------------------------------------
represents and warrants as follows:
2
<PAGE>
(a) General:
-------
(i) The Purchaser has all requisite authority to enter into this
Agreement and to perform all of the obligations required to be
performed by it hereunder.
(ii) Neither the Company nor any person acting on behalf of the
Company has offered or sold the Securities to the Purchaser by means
of any form of general solicitation or general advertising. The
Purchaser has not received, paid or given, directly or indirectly, any
commission or remuneration for or on account of any sale, or the
solicitation of any sale, of the Securities.
(b) Information Concerning the Company:
----------------------------------
(i) The Purchaser is familiar with the business and financial
condition, properties, operations and prospects of the Company.
(ii) The Purchaser has been given full access to all material
information concerning the condition, properties, operations and
prospects of the Company. The Purchaser and his advisors (if any) have
had an opportunity to ask questions of, and to receive information
from, the Company and persons acting on its behalf concerning the
terms and conditions of the Purchaser's investment in the Securities,
and to obtain any additional information necessary to verify the
accuracy of the information and data received by the Purchaser. The
Purchaser is satisfied that there is no material information
concerning the condition, properties, operations and prospects of the
Company of which Purchaser is unaware.
(iii) The Purchaser has made, either alone or together with his
advisors (if any), such independent investigation of the Company, its
management, and related matters as the Purchaser deems to be, or the
Purchaser's advisors (if any) have advised to be, necessary or
advisable in connection with this investment; and the Purchaser and
his advisors (if any) have received all information and data which the
Purchaser and his advisors (if any) believe to be necessary in order
to reach an informed decision as to the advisability of investing in
the Securities.
3
<PAGE>
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be
deemed to have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the Securities
involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Warrant and that resale of
the Shares, the Warrant and the Warrant Shares will be restricted as
herein provided.
(c) Status of Purchaser:
-------------------
(i) The Purchaser either alone or with Purchaser's advisors (if
any) has such knowledge, skill and experience in business, financial
and investment matters as to be capable of evaluating the merits and
risks of an investment in the Securities. To the extent that the
Purchaser has deemed it appropriate to do so, the Purchaser has
retained at Purchaser's own expense, and relied upon, appropriate
professional advice regarding the investment, tax and legal merits and
consequences of this Agreement and owning the Shares, the Warrant and
Warrant Shares, as the case may be.
(d) Restrictions on Transfer or Sale
--------------------------------
(i) The Purchaser is acquiring the Securities and any shares of
Common Stock purchased upon exercise of the Warrant solely for its own
account, for investment purposes, and not with a view to, or for
resale in connection with, any distribution of the Shares, the Warrant
or such shares of Common Stock. The Purchaser understands that neither
the Shares, the Warrant nor such underlying Common Stock have been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state (collectively
referred to as "State Securities Laws") by reason of specific
exemptions under the provisions thereof which depend in part upon the
investment intent of the Purchaser and of the other representations
made by the Purchaser in this Agreement. The Purchaser understands
that the Company is relying upon the representations and agreements
contained in this Agreement (and any supplemental information) for the
purpose of determining whether this transaction meets the requirements
for such exemptions.
4
<PAGE>
(ii) The Purchaser understands that the Shares, the Warrant and
such underlying Common Stock are "restricted securities" under
applicable federal securities laws and that the Securities Act and the
rules of the Securities and Exchange Commission (the "Commission")
provide in substance that the Purchaser may dispose of such securities
or any of them only pursuant to an effective registration statement
under the Securities Act or an exemption therefrom, and understands
that the Company has no obligations or intentions to register any of
such securities thereunder, or to take any other action so as to
permit sales pursuant to the Securities Act, except as set forth in
the Registration Rights Agreement. Accordingly, the Purchaser
understands that under the Commission's rules, unless disposed of
pursuant to an effective registration statement under the Securities
Act, the Purchaser may dispose of the Note, Warrants and underlying
Common Stock only in accordance with the provisions of Rule 144 under
the Securities Act, to the extent available, or in "private
placements" which are exempt from registration under the Securities
Act, in which event the transferee will acquire "restricted
securities" subject to the same limitations as in the hands of the
Purchaser. As a consequence, absent such an effective registration
statement under the Securities Act, the Purchaser understands that it
may be required to bear the economic risks of the investment in the
Securities (and the underlying Common Stock) for an indefinite period
of time.
(iii) The Purchaser agrees that (a) it will not sell, assign,
pledge, give, transfer, of otherwise dispose of the Shares, the
Warrant or such underlying Common Stock or any interest in any thereof
or therein, or make any offer or attempt to do any of the foregoing,
except pursuant to registration of such securities under the
Securities Act and any applicable State Securities Laws or in a
transaction which, in the opinion of counsel for the Purchaser
satisfactory to the Company (which requirement may be waived by the
Company upon advice of counsel), is exempt from the registration
provisions of the Securities Act and any applicable State Securities
Laws; (b) the Shares, the Warrant and any certificate(s) representing
shares of Common Stock issued upon exercise of the Warrant may bear a
legend making reference to the foregoing restrictions; and (c) the
Company and any transfer agent for shares of its
5
<PAGE>
Common Stock shall not be required to give effect to any purported
transfer of any of such securities except upon compliance with the
foregoing restrictions.
(iv) In no event shall any sale, assignment, pledge or transfer
of the Shares, the Warrant or such underlying Common Stock by the
Purchaser to a transferee give rise to rights of any such transferee
under the Registration Rights Agreement.
6. Conditions to Obligations of Purchaser and the Company. The obligations
------------------------------------------------------
of the Purchaser to purchase and pay for the Securities specified herein and of
the Company to sell and deliver such Securities are subject to the satisfaction
at or prior to the Closing of the following conditions precedent:
(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall
be true and correct on and as of the Closing in all respects with the same
effect as though representations and warranties had been made on and as of
the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from an executive officer of the other party to the effect that
its representations and warranties are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Fee. In connection with the purchase and sale of the Securities, Win
---
Securities, as placement agent for the Company, shall receive at the Closing a
fee from the Company equal to $25,000 plus reimbursement of expenses, not to
exceed $7,500.
6
<PAGE>
8. Waiver, Amendment. Neither this Agreement nor any provisions hereof
------------------
shall be modified, changed, discharged or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
9. Assignability. Neither this Agreement nor any right, remedy, obligation
-------------
or liability arising hereunder or by reason hereof shall be assignable by either
the Company or the Purchaser without the prior written consent of the other
party, which consent shall not be unreasonably withheld.
10. Applicable Law. This Agreement shall be governed by and construed in
---------------
accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings contained in
--------------------------
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
7
<PAGE>
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: John F. Watkins, Esq.
(b) If to the Purchaser, at the following address:
Van Moer, Santerre & Company
Blvd. Anspach 111
1000 Brussels
Belgium
Attn: Phillippe de Cock
with a copy to:
______________________
______________________
______________________
______________________
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be binding upon
--------------
and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
8
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this ___ day of November, 1998.
VAN MOER SANTERRE & COMPANY
By:
----------------------------------------
Name: Charles Santerre
Title:
PENN OCTANE CORPORATION
By:
----------------------------------------
Name: Jerome B. Richter
Title: President and Chief Executive Officer
9
<PAGE>
EXHIBIT 1
----------
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 13, 2000
Warrant to Purchase 125,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Van Moer Santerre & Company
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November __, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 125,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.25 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
15. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time and from time to time by presentation and surrender hereof to the
Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the right of the
Holder to purchase the balance of the shares purchasable hereunder. Upon receipt
by the Company of this Warrant at the office of the Company, in proper form for
exercise, accompanied by payment of the Exercise Price, the Holder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. The issuance of
certificates for shares of Common Stock upon the exercise of this
<PAGE>
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
16. Reservation of Shares; Stock Fully Paid. The Company agrees that at all
---------------------------------------
times there shall be authorized and reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
17. Fractional Shares. This Warrant shall not be exercisable in such manner
-----------------
as to require the issuance of fractional shares. If, as a result of adjustment
in the Exercise Price or the number of shares of Common Stock to be received
upon exercise of this Warrant, fractional shares would be issuable, no such
fractional shares shall be issued. In lieu thereof, the Company shall pay the
Holder an amount in cash equal to such fraction multiplied by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
18. Exchange or Assignment of Warrant. This Warrant is exchangeable without
---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation and surrender hereof to the Company for any other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 11 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
2
<PAGE>
19. Rights of the Holder. The Holder shall not, by virtue hereof, be
---------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
20. Adjustment of Exercise Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise or exchange of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
A. Adjustment for Change in Capital Stock. If at any time after the date
---------------------------------------
hereof, the Company:
1. pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
2. subdivides its outstanding shares of Common Stock into a greater
number of shares;
3. combines its outstanding shares of Common Stock into a smaller
number of shares;
4. makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock; or
5. issues by reclassification of its Common Stock any shares of its
capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares of
capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
B. Adjustment for Other Distributions. If at any time after the date
-------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E' = E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
3
<PAGE>
F = the aggregate fair market value (as conclusively determined
by the Board of Directors of the Company) on the record
date of the assets or debt securities to be distributed
divided by the number of outstanding shares of Common
Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
C. Deferral of Issuance or Payment. In any case in which an event covered
-------------------------------
by this Section 6 shall require that an adjustment in the Exercise Price be made
effective as of a record date, the Company may elect to defer until the
occurrence of such event by (i) issuing to the Holder, if this Warrant is
exercised after such record date, the shares of Common Stock and other capital
stock of the Company, if any, issuable upon such exercise over and above the
shares of Common Stock or other capital stock of the Company, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to such
adjustment, and (ii) paying to the Holder by check any amount in lieu of the
issuance of fractional shares pursuant to Section 3.
D. When No Adjustment Required. No adjustment need be made for a change in
---------------------------
the par value or no par value of the Common Stock.
E. Statement of Adjustments. Whenever the Exercise Price and number of
-------------------------
shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
F. No Adjustment Upon Exercise of Warrants. No adjustments shall be made
----------------------------------------
under any Section herein in connection with the issuance of Warrant Stock upon
exercise or exchange of the Warrants.
G. No adjustment for Small Amounts. Anything herein to the contrary
-----------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
H. Common Stock Defined. Whenever reference is made in Section 6(a) to the
--------------------
issue of shares of Common Stock, the term "Common Stock" shall include any
equity securities of any class of the Company hereinafter authorized which shall
not be limited to a fixed sum or percentage in respect of the right of the
holders thereof to participate in dividends or distributions of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
4
<PAGE>
Subject to the provisions of Section 7 hereof, however, shares issuable upon
exercise or exchange hereof shall include only shares of the class designated as
Common Stock of the Company as of the date hereof or shares of any class or
classes resulting from any reclassification or reclassifications thereof or as a
result of any corporate reorganization as provided for in Section 7 hereof.
7. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
-------------------------
(i) if the Company shall pay any dividend or make any distribution upon its
Common Stock, or (ii) if the Company shall offer to the holders of Common Stock
for subscription or purchase by them any shares of stock or securities of any
class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company, or voluntary or involuntary
dissolution or liquidation of the Company shall be effected, then, in any such
case, the Company shall cause to be mailed to the Holder, at least thirty (30)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
8. Certain Obligations of the Company. The Company agrees that it will not
----------------------------------
increase the par value of the shares of Warrant Stock issuable upon exercise of
this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable upon exercise of
this Warrant, the Company will take such corporate action, as in the opinion of
its counsel, may be necessary in order that the Company may validly issue fully
paid, nonassessable shares of such Warrant Stock. The Company will maintain an
office or agency (which shall initially be the Company's principal office in
Redwood City, California) where presentations and demands to or upon the Company
in respect of this Warrant may be made and will give notice in writing to the
registered holders of the then outstanding Warrants, at their addresses as shown
on the books of the Company, of each change of location thereof.
9. Repurchase Right. Notwithstanding any other provisions of this Warrant,
----------------
the Company may, in the event that, after the date six months after the date
hereof, the closing bid price, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, of the
Company's Common Stock is greater than or equal to 150% of the Exercise Price
for five consecutive trading days, upon not less than five (5) days' notice in
writing to the Holder, repurchase all or any portion of this Warrant at a
purchase price equal to $.10 per share of Common Stock covered hereby, such
purchase price to be proportionally adjusted each time the Exercise Price is
adjusted pursuant to Section 6 hereof. During such five (5) day period, the
Holder may exercise such Warrant in accordance with the terms hereof. The
closing on such repurchase shall occur on the date and at the time set forth in
such notice at the office of the Company in Redwood City, California or at such
other place as shall be agreed upon by the Company and the Holder. At the
Closing, the Company shall deliver to the Holder an amount equal to the purchase
price in immediately available funds and the Holder will deliver this Warrant to
the Company for cancellation. To the extent any repurchase hereunder is of less
than all of the rights represented by this Warrant, the Company will deliver to
the Holder a new Warrant covering the rights not so purchased.
5
<PAGE>
10. Determination by Board of Directors. All determinations by the Board of
-----------------------------------
Directors of the Company under the provisions of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance with
sound financial practices.
11. Notice. All notices to the Holder shall be in writing, and all notices
------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.
12. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
---------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
13. Number and Gender. Whenever the singular number is used herein, the
-----------------
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate.
14. Applicable Law. This Warrant shall be governed by, and construed in
---------------
accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
----------------------------------------
Name: Jerome B. Richter
Title: President and Chief Executive Officer
Dated: November ___, 1998
6
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ___________ shares of Common Stock and hereby makes payment
of in payment of the exercise price thereof.
Signature______________________________
7
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
the Closing Date (as defined herein) by and among Penn Octane Corporation, a
Delaware corporation (the "Company"), and Van Moer Santerre & Company, a
Luxembourg company ("Purchaser").
This Agreement is entered into pursuant to the Purchase Agreement between
the Company and Purchaser (the "Purchase Agreement"). In order to induce the
Purchaser to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution of
this Agreement by the Company is a condition to the closing under the Purchase
Agreement.
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have the respective
meanings set forth in the Purchase Agreement. As used in this Agreement, the
following terms shall have the following meanings:
Closing Date: The date on which the Closing occurs pursuant to the
--------------
Purchase Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
Losses: The term "Losses" shall have the meaning set forth in Section 6
------
hereof.
Prospectus: The prospectus included in any Registration Statement
----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
Registrable Securities: The Shares and all shares of Common Stock issuable
-----------------------
upon exercise of the Warrants, plus any Common Stock issued or issuable to the
Purchaser in respect of the Shares or Warrant Shares, pursuant to any stock
split, stock dividend, recapitalization, or similar event. The Warrant is not a
Registrable Security hereunder. As to any Registrable Securities, such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of pursuant to such effective registration statement, (ii) such securities shall
have been distributed pursuant to Rule 144 or any similar provision then in
force, under the Securities Act, (iii) such securities shall have been otherwise
transferred, new certificates or other evidences of ownership for them not
bearing a legend restricting further transfer and not subject to any stop
transfer order or other restrictions on transfer shall have been delivered by
the Company and subsequent disposition of such securities shall not require
<PAGE>
registration or qualification of such securities under the Securities Act or any
state securities laws then in force or (iv) the sale of such securities by the
holder thereof shall no longer require registration under the Securities Act or
such securities shall cease to be outstanding.
Registration Expenses: All reasonable expenses incurred by the Company in
----------------------
complying with Section 3 hereof, including all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, and blue
sky fees and expenses.
Registration Statement: Any registration statement of the Company which
------------------------
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference in
such registration statement.
Restricted Securities: The Shares and the Warrant Shares upon original
-----------------------
issuance thereof, and at all times subsequent thereto, until, in the case of any
such security, it is no longer required to bear the legend set forth on such
security pursuant to the terms of the security, the Purchase Agreement and
applicable law.
Purchase Agreement: The Agreement by and among the Company and the
--------------------
Purchaser pursuant to which the Shares and the Warrant were issued.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
----------
from time to time, or any similar rule or regulation hereafter adopted by the
Commission (excluding Rule 144A).
2. Securities Subject to this Agreement
----------------------------------------
The securities entitled to the benefits of this Agreement are the Registrable
Securities.
3. "Piggy-Back" Registrations.
---------------------------
(a) If at any time the Company shall determine to register any of its
Common Stock under the Securities Act, whether in connection with a public
offering by the Company, a public offering by shareholders, or both, including,
without limitation, by means of any shelf registration pursuant to Rule 415
under the Securities Act or any similar rule or regulation, but other than a
registration to implement an employee benefit or dividend reinvestment plan, the
Company shall promptly give written notice thereof to the Purchaser who shall be
a registered holder of Registrable Securities and shall use its reasonable
efforts to effect the registration under the Securities Act of such Registrable
Securities as may be requested in a writing delivered to the Company within 30
days after such notice by the Purchaser as well as to include such Registrable
Securities in any notifications, registrations or qualifications under any state
securities laws which shall be made or obtained with respect to the securities
being registered by the Company; provided, however, that (a) any distribution of
-------- -------
Registrable Securities pursu-ant to such registration shall be managed by the
investment banking firm, if any, managing the distribution of the securities
being offered by the Company on the same terms as all other securities to be
registered, and (b) the Company shall not be required under this Section 3 to
include Registrable Securities in any registration of securities if the Company
shall have been advised by the investment banking firm managing the offering of
the securities proposed to be registered by the Company or others that the
inclusion of Registrable Securities in such offering would substantially
interfere with the orderly sale of such securities which the Company or others
propose to register; provided, however, that in making any determination under
this subparagraph (b) as to the inclusion of the Registrable Securities in any
<PAGE>
such offering, Registrable Securities shall be registered on a pro-rata basis
with any other securities as to which the Company has granted or may in the
future grant registration rights. All expenses of any registration and offering
of Registrable Securities pursuant to this Section 3 (including, without
limitation, registration fees and fees and disbursements of the Company's
counsel) shall be borne by the Company, except that the Company shall not bear
underwrit-ing discounts or commissions attributable to Registrable Securities,
the fees of any separate counsel for the holders of Registrable Securities or
related transfer taxes.
4. Registration Procedures.
------------------------
(a) In connection with any registration pursuant to Section 3 hereof, the
Company will prepare and file with the SEC, a Registration Statement, and any
amendments and supplements thereto, on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate, and use its
reasonable efforts to cause such Registration Statement to become effective;
provided that before filing with the SEC a Registration Statement or prospectus
- --------
or any amendments or supplements thereto, the Company will (i) furnish to
counsel selected by the Purchaser copies of all such documents proposed to be
filed, which documents will be subject to the review of such counsel, and (ii)
notify the Purchaser of any stop order issued or threatened by the SEC and take
all reasonable actions required to prevent the entry of such stop order or to
remove it if entered. The Company will also (i) promptly notify the Purchaser of
the effectiveness of such Registration Statement, (ii) furnish to the Purchaser
such number of copies of such Registration Statement, and each amendment and
supplement thereto, the Prospectus included in such Registration Statement and
such other documents as the Purchaser may reasonably request; (iii) use its
reasonable efforts to register or qualify such securities to be registered under
such other securities or blue sky laws of such jurisdictions as the Purchaser
reasonably requests; (iv) use its reasonable efforts to cause all such
securities to be registered to be listed on each securities exchange on which
similar securities issued by the Company are then listed, and to provide a
transfer agent and registrar for such securities to be registered no later than
the effective date of such Registration Statement; (v) enter in to such
customary agreements (including an underwriting agreement in customary form) and
take all such other actions as the Lenders or the underwriters retained by the
Purchaser, if any, reasonably request in order to expedite or facilitate the
disposition of such securities to be registered, including customary
indemnification; and (vi) otherwise use its reasonable efforts to comply with
all applicable rules and regulations of the SEC. The terms of this Section 4
shall not require the Company to qualify as a foreign corporation or as a dealer
in securities or to execute or file any general consent to service of process
under the laws of any such jurisdiction where it is not so subject.
(b) In connection with any effective Registration Statement filed pursuant
to this Agreement, the Company will immediately notify the Purchaser
participating in the distribution to which such Registration Statement relates
of the happening of any event as a result of which the prospectus included in
such Registration Statement contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and will promptly prepare and furnish to the Purchaser a supplement or
amendment to such prospectus so that such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing. Notwithstanding the foregoing, if the
Company determines in its reasonable business judgment that an amendment or
supplement to any such prospectus would interfere with any material financing,
acquisition, corporate reorganization, or other material corporate transaction
or development involving the Company, the Company may delay the preparation and
filing of such amendment or supplement for a period of up to 60 days in order to
complete or make a public announcement with respect to such material transaction
or development (it being understood that the Company shall be obligated to
extend the period of time it is required to maintain in effect any such
Registration Statement to take into account the period of time that the
Purchaser is unable to offer or sell Registrable Securities by reason of this
Section 4(c)).
<PAGE>
5. Holdback Agreements.
--------------------
(a) Restrictions on Public Sale by Holders of Registrable Securities. Each
----------------------------------------------------------------
holder of Registrable Securities whose Registrable Securities are covered by a
Registration Statement filed pursuant to Section 3 hereof agrees, if requested
by the managing underwriters in an underwritten offering (to the extent timely
notified in writing by the Company or the managing underwriters), not to effect
any public sale or distribution of securities of the Company of any class
included in such Registration Statement, including a sale pursuant to Rule 144
(except as part of such underwritten offering), during the 10-day period prior
to, and the 90-day period beginning on, the effective date of any Registration
Statement.
(b) The foregoing provisions shall not apply to any holder of Registrable
Securities if such holder is prevented by applicable statute or regulation from
entering into any such agreement; provided, however, that any such holder shall
-----------------
undertake in its request to participate in any such underwritten offering not to
effect any public sale or distribution of the class of Registrable Securities
covered by such Registration Statement (except as part of such underwritten
offering) during such period unless it has provided five (5) business days prior
written notice of such sale or distribution to the managing underwriter or
underwriters.
6. Indemnification
---------------
(a) Indemnification by Company. The Company shall indemnify and hold
---------------------------
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act), and the officers, directors, agents or
employees of any such controlling person, from and against all losses, claims,
damages, liabilities, costs (including, without limitation, all reasonable
attorneys' fees) and expenses (collectively, "Losses"), arising out of or based
upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus, or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made (in the case of any Prospectus) not misleading, except insofar as the same
are based solely upon information furnished to the Company by such holder for
use therein; provided, however, that the Company shall not be liable in any such
-----------------
case to the extent that any such Loss arises out of or is based upon an untrue
statement or omission made in any preliminary prospectus or Prospectus if (i)
such holder failed to send or deliver a copy of the Prospectus or Prospectus
supplement with or prior to the delivery of written confirmation of the sale of
Registrable Securities and (ii) the Prospectus or Prospectus supplement would
have corrected such untrue statement or omission.
(b) Indemnification by Holder of Registrable Securities. In connection with
---------------------------------------------------
any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities shall furnish to the
Company in writing such information as the Company may reasonably request for
use in connection with any Registration Statement or Prospectus. Each holder of
Registrable Securities shall indemnify and hold harmless, to the full extent
permitted by law, the Company, and its officers, directors, agents and
employees, each person who controls the Company (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents or employees of any such controlling person, from and against
all Losses arising out of or based upon any untrue statement of a material fact
contained in any Registration Statement, Prospectus or preliminary prospectus,
or arising out of or based upon any omission of a material fact required to be
<PAGE>
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made (in the case of any Prospectus) not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such holder
to the Company for use in such Registration Statement, Prospectus or preliminary
prospectus. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any holder and any of
their respective directors, officers, agents, employees or controlling persons
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) and shall survive the transfer of such securities by such holder.
(c) Conduct of Indemnification Proceedings. If any action or proceeding
----------------------------------------
(including any governmental investigation or inquiry) shall be brought or any
claim shall be asserted against any person entitled to indemnity hereunder (an
"indemnified party"), such indemnified party shall promptly notify the party
from which such indemnity is sought (the "indemnifying party") in writing, and
the indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the indemnified party and the
payment of all fees and expenses incurred in connection with the defense
thereof. All such fees and expenses (including any fees and expenses incurred in
connection with investigating or preparing to defend such action or proceeding)
incurred by the indemnified party, shall be paid to the indemnified party, as
incurred, within 20 days of written notice thereof to the indemnifying party;
provided, however, that if, in accordance with this Section 6, the indemnifying
- ------------------
party is not liable to the indemnified party, such fees and expenses shall be
returned promptly to the indemnifying party. Any such indemnified party shall
have the right to employ separate counsel in any such action, claim or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be the expense of such indemnified party unless (a) the
indemnifying party has agreed to pay such fees and expenses, (b) the
indemnifying party shall have failed promptly to assume the defense of such
action, claim or proceeding and to employ counsel reasonably satisfactory to the
indemnified party in any such action, claim or proceeding, or (c) the named
parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section 6
------------
from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
<PAGE>
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 6(c), any legal or other fees or expenses reasonably incurred by such
party in connection with any action, suit, claim, investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any registration are to be
sold in an underwritten offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by
the Company. No holder of Registrable Securities may participate in any
underwritten registration hereunder unless such holder (i) agrees to sell such
holder's Registrable Securities on the basis provided in the underwriting
arrangements approved by the Company, and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
9. Miscellaneous
-------------
(a) Amendments and Waivers. The provisions of this Agreement, including the
----------------------
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company obtains the written consent of holders of at least a majority
of the then outstanding Registrable Securities affected by such amendment,
modification or supplement. Notwithstanding the foregoing, a waiver or consent
to depart from the provisions hereof with respect to a matter which relates
exclusively to the rights of holders of Registrable Securities whose securi-ties
are being sold pursuant to a Registration Statement and which does not directly
or indirectly affect the rights of holders of Registrable Securities whose
<PAGE>
securities are not being sold pursuant to such Registration Statement may be
given by holders of a majority of the Registrable Securities being sold by such
holders.
(b) Notices. All notices and other communications provided for or permitted
-------
hereunder shall be made in writing by hand-delivery, registered first-class
mail, next day air courier, telex, or telecopy: (i) if to a holder of
Registrable Securities, at the most current address given by such holder to the
Company in accordance with the provisions of this Section 9(b), which address
initially is, with respect to the Purchaser, the address set forth in Section __
of the Purchase Agreement; and (ii) if to the Company, at 900 Veterans
Boulevard, Suite 240, Redwood City California 94063, attention: Secretary, and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 8(b).
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; two business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being sent by next day air courier; when answered back, if telexed; and when
receipt acknowledged, if telecopied.
(c) Transfer of Registration Rights. The rights granted to the holders
---------------------------------
pursuant to this Agreement to cause the Company to register securities may not
be assigned or otherwise transferred in any way other than to an Affiliate of
the holder to whom the holder has transferred all or any part of the Warrant.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts by the parties hereto, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
(g) Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(h) Entire Agreement. This Agreement is intended by the parties to be a
-----------------
final expression of their agreement and a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties nor
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the securities
sold pursuant to the Purchase Agreement. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
<PAGE>
(i) Attorneys' Fees. If any action or proceeding is brought to enforce any
----------------
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to its costs and expenses and any other available
remedy.
IN WITNESS WHEREOF, the parties have executed this agreement as of November
__, 1998.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
-------------------------------------------------------
Jerome B. Richter
Chairman, President and Chief Executive Officer
VAN MOER SANTERRE & COMPANY
By: ____________________________________
Name:
Title:
<PAGE>
EXHIBIT 1
----------
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after November 13, 2000
Warrant to Purchase 125,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Van Moer Santerre & Company
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on November __, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 125,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.25 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<PAGE>
15. Exercise of Warrant. This Warrant may be exercised in whole or in
--------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
16. Reservation of Shares; Stock Fully Paid. The Company agrees that
-----------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
17. Fractional Shares. This Warrant shall not be exercisable in such
------------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable, no
such fractional shares shall be issued. In lieu thereof, the Company shall pay
the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ Stock Market, on such
other principal stock exchange on which such stock is then listed or admitted
to trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices on such day in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation System or, if not so
quoted, then as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company. If there shall be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not less than book value, as may be determined by the Board of Directors of the
Company.
2
<PAGE>
18. Exchange or Assignment of Warrant. This Warrant is exchangeable
------------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 11 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
19. Rights of the Holder. The Holder shall not, by virtue hereof, be
----------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
20. Adjustment of Exercise Price and Number of Shares. The number and
--------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
A. Adjustment for Change in Capital Stock. If at any time after the
-----------------------------------------
date hereof, the Company:
1. pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
2. subdivides its outstanding shares of Common Stock into a
greater number of shares;
3. combines its outstanding shares of Common Stock into a smaller
number of shares;
4. makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
5. issues by reclassification of its Common Stock any shares of
its capital stock;
3
<PAGE>
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares of
capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
B. Adjustment for Other Distributions. If at any time after the date
------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:
E' = E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per share
of Common Stock on the record date of the distribution.
F = the aggregate fair market value (as conclusively determined
by the Board of Directors of the Company) on the record date of
the assets or debt securities to be distributed divided by the
number of outstanding shares of Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
C. Deferral of Issuance or Payment. In any case in which an event
-----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer until the
occurrence of such event by (i) issuing to the Holder, if this Warrant is
exercised after such record date, the shares of Common Stock and other capital
4
<PAGE>
stock of the Company, if any, issuable upon such exercise over and above the
shares of Common Stock or other capital stock of the Company, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to such
adjustment, and (ii) paying to the Holder by check any amount in lieu of the
issuance of fractional shares pursuant to Section 3.
D. When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value or no par value of the Common Stock.
E. Statement of Adjustments. Whenever the Exercise Price and number of
------------------------
shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of Common Stock purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
F. No Adjustment Upon Exercise of Warrants. No adjustments shall be
------------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
G. No adjustment for Small Amounts. Anything herein to the contrary
----------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
H. Common Stock Defined. Whenever reference is made in Section 6(a) to
--------------------
the issue of shares of Common Stock, the term "Common Stock" shall include any
equity securities of any class of the Company hereinafter authorized which shall
not be limited to a fixed sum or percentage in respect of the right of the
holders thereof to participate in dividends or distributions of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
Subject to the provisions of Section 7 hereof, however, shares issuable upon
exercise or exchange hereof shall include only shares of the class designated as
Common Stock of the Company as of the date hereof or shares of any class or
classes resulting from any reclassification or reclassifications thereof or as a
result of any corporate reorganization as provided for in Section 7 hereof.
7. Notice to Warrant Holders. So long as this Warrant shall be
----------------------------
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon its Common Stock, or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of stock or
securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of the
Company, or voluntary or involuntary dissolution or liquidation of the Company
5
<PAGE>
shall be effected, then, in any such case, the Company shall cause to be mailed
to the Holder, at least thirty (30) days prior to the date specified in (x) or
(y) below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (x) a record is to be taken for
the purpose of such dividend, distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, conveyance, dissolution
or liquidation is to take place and the date, if any is to be fixed, as of which
the holders of Common Stock of record shall be entitled to exchange their shares
of Common Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance, dissolution
or liquidation.
8. Certain Obligations of the Company. The Company agrees that it will
----------------------------------
not increase the par value of the shares of Warrant Stock issuable upon exercise
of this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable upon exercise of
this Warrant, the Company will take such corporate action, as in the opinion of
its counsel, may be necessary in order that the Company may validly issue fully
paid, nonassessable shares of such Warrant Stock. The Company will maintain an
office or agency (which shall initially be the Company's principal office in
Redwood City, California) where presentations and demands to or upon the Company
in respect of this Warrant may be made and will give notice in writing to the
registered holders of the then outstanding Warrants, at their addresses as shown
on the books of the Company, of each change of location thereof.
9. Repurchase Right. Notwithstanding any other provisions of this
-----------------
Warrant, the Company may, in the event that, after the date six months after the
date hereof, the closing bid price, as reported on the NASDAQ SmallCap Market or
such other exchange on which the Company's Common Stock may then be quoted, of
the Company's Common Stock is greater than or equal to 150% of the Exercise
Price for five consecutive trading days, upon not less than five (5) days'
notice in writing to the Holder, repurchase all or any portion of this Warrant
at a purchase price equal to $.10 per share of Common Stock covered hereby, such
purchase price to be proportionally adjusted each time the Exercise Price is
adjusted pursuant to Section 6 hereof. During such five (5) day period, the
Holder may exercise such Warrant in accordance with the terms hereof. The
closing on such repurchase shall occur on the date and at the time set forth in
such notice at the office of the Company in Redwood City, California or at such
other place as shall be agreed upon by the Company and the Holder. At the
Closing, the Company shall deliver to the Holder an amount equal to the purchase
price in immediately available funds and the Holder will deliver this Warrant to
the Company for cancellation. To the extent any repurchase hereunder is of less
than all of the rights represented by this Warrant, the Company will deliver to
the Holder a new Warrant covering the rights not so purchased.
10. Determination by Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
11. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
6
<PAGE>
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
12. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
13. Number and Gender. Whenever the singular number is used herein,
-------------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
14. Applicable Law. This Warrant shall be governed by, and construed
---------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By:
----------------------------------------
Name: Jerome B. Richter
Title: President and Chief Executive Officer
Dated: November ___, 1998
7
<PAGE>
PURCHASE FORM
--------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ___________ shares of Common Stock and hereby makes payment
of in payment of the exercise price thereof.
Signature______________________________
8
<PAGE>
PURCHASE AGREEMENT
-------------------
THIS PURCHASE AGREEMENT made and entered into as of December14, 1998, by
and between KFP Grand LTD., a Texas limited partnership (the "Purchaser") and
Penn Octane Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 500,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock"), and (ii) a warrant, exercisable until December 13,
2003 at $1.75 per share of Common Stock (subject to adjustment), to purchase
300,000 shares (the "Warrant Shares") of Common Stock substantially in the form
of Exhibit 1 hereto (the "Warrant"; the Shares and the Warrant being herein
collectively referred to as the "Securities"); and
WHEREAS, the Company and the Purchaser desire to enter into a Registration
Rights Agreement with respect to the Shares and the Warrant Shares,
substantially in the form annexed as Exhibit 2 hereto (the "Registration Rights
Agreement"), all on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the agreements and obligations herein
contained, the Purchaser and the Company hereby agree as follows:
1. Purchase and Sale of the Securities. Subject to the terms and
----------------------------------------
conditions set forth in this Agreement, the Company agrees to sell to the
Purchaser, and the Purchaser agrees to purchase from the Company, the Securities
for a purchase price equal to Five Hundred Thousand ($500,000.00) Dollars.
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on December 14, 1998 at 10:00 A.M. local time
at the offices of the Company in Redwood City, California, or at such other time
and place as the Company shall specify. At the Closing, the Purchaser shall
deliver to the Company payment for the Securities being purchased in immediately
<PAGE>
available funds and the Company shall deliver the Warrant to the Purchaser and
within seven business days thereafter, the Company shall deliver a stock
certificate representing the Shares to the Purchaser.
3. Registration Rights. The Purchaser shall have such registration
--------------------
rights with respect to the Share and the Warrant Shares as are set forth in the
Registration Rights Agreement.
4. Representations and Warranties of the Company. As of the Closing,
-----------------------------------------------
the Company represents and warrants that:
(a) the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and has the
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder;
(b) the execution, delivery and performance of this Agreement, the
sale and delivery of the Securities and the sale and delivery of the Warrant
Shares pursuant to the Warrant have been duly authorized by all necessary
corporate action on the part of the Company and do not violate the Certificate
of Incorporation and by-laws of the Company, as amended and/or restated to date,
any law applicable to the Company, or any covenant contained in any agreement,
indenture, mortgage, promissory note, or other instrument to which the Company
is a party or to which the Company or its assets are subject.
(c) the Shares, when issued and paid for in accordance with the terms
of this Agreement, will be legally and validly issued, fully paid and
nonassessable, free of preemptive rights and any other rights of others;
(d) the Company has reserved for issuance upon the exercise of the
Warrant the number of shares of Common Stock equal to the number of Warrant
Shares;
2
<PAGE>
(e) the Warrant Shares, when issued upon exercise of the Warrant and
payment therefore in accordance with the terms of the Warrant, will be legally
and validly issued, fully paid and nonassessable, free of preemptive rights and
any other rights of others; and
(f) The Company's annual report on Form 10-K for the year ended July
31, 1998 and all documents incorporated therein by reference are true, complete,
and correct in all material respects, do not contain any misstatement of a
material fact or omit to state any material fact necessary in order to make the
facts stated therein, in light of the circumstances in which such statements
were made, not misleading.
3
<PAGE>
5. Representations and Warranties of the Purchaser. The Purchaser
----------------------------------------------------
represents and warrants as follows:
(a) General:
-------
(i) The Purchaser has all requisite authority to enter into this
Agreement and to perform all of the obligations required to be performed by it
hereunder.
(ii) Neither the Company nor any person acting on behalf of the
Company has offered or sold the Securities to the Purchaser by means of any form
of general solicitation or general advertising. The Purchaser has not received,
paid or given, directly or indirectly, any commission or remuneration for or on
account of any sale, or the solicitation of any sale, of the Securities.
(b) Information Concerning the Company:
-------------------------------------
(i) The Purchaser is familiar with the business and financial
condition, properties, operations and prospects of the Company.
(ii) The Purchaser has been given full access to all material
information concerning the condition, properties, operations and prospects of
the Company. The Purchaser and its advisors (if any) have had an opportunity to
ask questions of, and to receive information from, the Company and persons
acting on its behalf concerning the terms and conditions of the Purchaser's
investment in the Securities, and to obtain any additional information necessary
to verify the accuracy of the information and data received by the Purchaser.
The Purchaser is satisfied that there is no material information concerning the
condition, properties, operations and prospects of the Company of which
Purchaser is unaware.
4
<PAGE>
(iii) The Purchaser has made, either alone or together with his
advisors (if any), such independent investigation of the Company, its
management, and related matters as the Purchaser deems to be, or the Purchaser's
advisors (if any) have advised to be, necessary or advisable in connection with
this investment; and the Purchaser and its advisors (if any) have received all
information and data which the Purchaser and its advisors (if any) believe to be
necessary in order to reach an informed decision as to the advisability of
investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Warrant and that resale of the
Shares, the Warrant and the Warrant Shares will be restricted as herein
provided.
(c) Status of Purchaser:
---------------------
(i) The Purchaser either alone or with Purchaser's advisors
(if any) has such knowledge, skill and experience in business, financial and
investment matters as to be capable of evaluating the merits and risks of an
investment in the Securities. To the extent that the Purchaser has deemed it
appropriate to do so, the Purchaser has retained at Purchaser's own expense, and
relied upon, appropriate professional advice regarding the investment, tax and
legal merits and consequences of this Agreement and owning the Shares, the
Warrant and Warrant Shares, as the case may be.
5
<PAGE>
(d) Restrictions on Transfer or Sale
------------------------------------
(i) The Purchaser is acquiring the Securities and any shares
of Common Stock purchased upon exercise of the Warrant solely for its own
account, for investment purposes, and not with a view to, or for resale in
connection with, any distribution of the Shares, the Warrant or such shares of
Common Stock. The Purchaser understands that neither the Shares, the Warrant
nor such underlying shares of Common Stock have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of any state (collectively referred to as "State Securities Laws") by
reason of specific exemptions under the provisions thereof which depend in part
upon the investment intent of the Purchaser and of the other representations
made by the Purchaser in this Agreement. The Purchaser understands that the
Company is relying upon the representations and agreements contained in this
Agreement (and any supplemental information) for the purpose of determining
whether this transaction meets the requirements for such exemptions.
(ii) The Purchaser understands that the Shares, the Warrant
and such underlying shares of Common Stock are or will be upon issurance
"restricted securities" under applicable federal securities laws and that the
Securities Act and the rules of the Securities and Exchange Commission (the
"Commission") provide in substance that the Purchaser may dispose of such
securities or any of them only pursuant to an effective registration statement
under the Securities Act or an exemption therefrom, and understands that the
Company has no obligations or intentions to register any of such securities
thereunder, or to take any other action so as to permit sales pursuant to the
Securities Act, except as set forth in the Registration Rights Agreement.
Accordingly, the Purchaser understands that under the Commission's rules, unless
disposed of pursuant to an effective registration statement under the Securities
6
<PAGE>
Act, the Purchaser may dispose of the Shares, Warrant and underlying shares of
Common Stock only in accordance with the provisions of Rule 144 under the
Securities Act, to the extent available, or in other transactions which are
exempt from registration under the Securities Act, in which the transferee may
acquire "restricted securities" subject to the same limitations as in the hands
of the Purchaser. As a consequence, absent such an effective registration
statement under the Securities Act, the Purchaser understands that it may be
required to bear the economic risks of the investment in the Securities (and the
underlying Common Stock) for an indefinite period of time.
(iii) The Purchaser agrees that (a) it will not sell, assign,
pledge, give, transfer, of otherwise dispose of the Shares, the Warrant or such
underlying Common Stock or any interest in any thereof or therein, or make any
offer or attempt to do any of the foregoing, except pursuant to registration of
such securities under the Securities Act and any applicable State Securities
Laws or in a transaction which, in the opinion of counsel for the Purchaser
satisfactory to the Company (which requirement may be waived by the Company upon
advice of counsel), is exempt from the registration provisions of the Securities
Act and any applicable State Securities Laws; (b) the Shares, the Warrant and
any certificate(s) representing shares of Common Stock issued upon exercise of
the Warrant may bear a legend making reference to the foregoing restrictions;
and (c) the Company and any transfer agent for shares of its Common Stock shall
not be required to give effect to any purported transfer of any of such
securities except upon compliance with the foregoing restrictions.
(iv) In no event shall any sale, assignment, pledge or
transfer of the Shares, the Warrant or such underlying Common Stock by the
Purchaser to a transferee give rise to rights of any such transferee under the
Registration Rights Agreement.
7
<PAGE>
6. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------------
obligations of the Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to the
satisfaction at or prior to the Closing of the following conditions precedent:
(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall be
true and correct on and as of the Closing in all respects with the same effect
as though representations and warranties had been made on and as of the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from the General Partner of the Purchaser and an executive officer
of the Company, respectively, to the effect that its representations and
warranties are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Board of Directors. The Company agrees that the Purchaser shall
--------------------
have one (1) seat on the Board of Directors. The Company will cause the Board
of Directors to elect the Purchaser's nominee to the Board of Directors as soon
as practicable after the purchase and sale of the Securities is consummated
hereunder. At each annual stockholders meeting of the Company after the
purchase and sale of the Securities is consummated hereunder, the Company will
cause the Purchaser's designee to be nominated as a part of management's slate
of nominees for election as directors. The Company shall use its best efforts
to ensure the election of the Purchaser's nominee as a director of the Company
at each such annual meeting of the stockholders of the Company.
8. Waiver, Amendment. Neither this Agreement nor any provisions hereof
-----------------
shall be modified, changed, discharged or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
8
<PAGE>
9. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the Purchaser without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: John F. Watkins, Esq.
9
<PAGE>
(b) If to the Purchaser, at the following address:
KFP Grand Ltd.
545 E. John Carpenter Freeway, Suite 1400
Irving, Texas 75062
Attn: Mahmood Khimji
President
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, TX 75201
Attn: Dudley Murrey
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be binding
---------------
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 14th day of December, 1998.
KFP GRAND LTD.
By:
----------------------------------------
Mahmood Khimji
President
PENN OCTANE CORPORATION
By:
----------------------------------------
Jerome B. Richter
President and Chief Executive Officer
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
the Closing Date (as defined herein) by and among Penn Octane Corporation, a
Delaware corporation (the Company), and the person whose signature appears on
the execution pages of this Agreement (together with its permitted successors
and assigns, the "Investors").
This Agreement is entered into pursuant to the Purchase Agreement between
the Company and the Investor dated as of December 14, 1998 (the "Purchase
Agreement"). In order to induce the Investor to enter into the Purchase
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement. The execution of this Agreement by the Company is a
condition to the closing under the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have the respective
meanings set forth in the Purchase Agreement. As used in this Agreement, the
following terms shall have the following meanings:
Closing Date: The date on which the Closing occurs pursuant to the
--------------
Purchase Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
Losses: The term "Losses" shall have the meaning set forth in Section 6
------
hereof.
Prospectus: The prospectus included in any Registration Statement
-----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
Registrable Securities: All shares of Common Stock sold pursuant to the
------------------------
Purchase Agreement, plus any Common Stock issued or issuable to the Investor in
respect of the Warrant Share pursuant to any stock split, stock dividend,
recapitalization, or similar event. The Warrants are not Registrable Securities
hereunder. As to any Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of pursuant to such effective
registration statement, (ii) such securities shall have been distributed
pursuant to Rule 144 or any similar provision then in force, under the
Securities Act, (iii) such securities shall have been otherwise transferred, new
<PAGE>
certificates or other evidences of ownership for them not bearing a legend
restricting further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company and subsequent
disposition of such securities shall not require registration or qualification
of such securities under the Securities Act or any state securities laws then in
force or (iv) the sale of such securities by the Investor shall no longer
require registration under the Securities Act or such securities shall cease to
be outstanding.
Registration Expenses: All reasonable expenses incurred by the Company in
----------------------
complying with Section 3 hereof, including all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, and blue
sky fees and expenses.
Registration Statement: Any registration statement of the Company which
------------------------
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference in
such registration statement.
Restricted Securities: The Shares and the Warrant Shares upon original
-----------------------
issuance thereof, and at all times subsequent thereto, until, in the case of any
such security, it is no longer required to bear the legend set forth on such
security pursuant to the terms of the security, the Purchase Agreement and
applicable law.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
----------
from time to time, or any similar rule or regulation hereafter adopted by the
Commission (excluding Rule 144A).
2. Securities Subject to this Agreement
----------------------------------------
The securities entitled to the benefits of this Agreement are the
Registrable Securities.
3. Registration Rights.
---------------------
(a) Demand Registration.
-------------------
(i) The Investor, or if the Investor shall have assigned any of its
rights to any permitted successors and assigns hereunder, the
holders of a majority of the Registrable Securities may request
that the Company register, and upon such request the Company will
register, all or part of the Registrable Securities (the "Demand
Registration"), subject to the terms and conditions of this
Agreement. The holders of Registrable Securities will be entitled
to request one Demand Registration which may be a shelf
registration relating to sales of proposed to be made by holders
of Registrable Securities pursuant to Rule 415 of the SEC. The
request (a "Registration Request") for the Demand Registration
shall specify (a) the approximate number of shares of Registrable
Securities
2
<PAGE>
requested to be registered (but not less than a majority of
shares of the then outstanding number of shares of Registrable
Securities), and (b) the intended method of distribution of such
shares. Within ten days after the date of sending of such
request, the Company will give written notice of such requested
registration to all other holders of Registrable of Securities
and will include in such Registrable Securities which holders of
Registrable Securities request the Company to include such
registration by written notice given to the Company with 15 days
after the date of sending of the Company's notice.
(ii) A registration will count as the Demand Registration if (a) the
holders of Registrable Securities are able to register and sell
at least seventy-five percent of the Registrable Securities
requested to be included in such registration or (b) a
registration statement relating to a Demand Registration is
prepared by the Company but prior to or after filing is withdrawn
or abandoned at the request of the holders of the Registrable
Securities to be covered by such registration statement (other
than as a result of a material adverse change to the Company or
following a postponement by the Company pursuant to Section
4(b)).
(iii)The Company may include in any Demand Registration securities
other than shares of Registrable Securities and securities to be
registered for offering and sale on behalf of the Company ("Other
Securities"), subject to compliance with the provisions of this
Section in the event any limitation is imposed on the number of
securities that may be included in such registration. If the
managing underwriter(s) advise the Company in writing that in
their opinion the number of shares of Registrable Securities and
Other Securities desired to be included in such offering exceeds
the number of shares of Registrable Securities and Other
Securities, if any, which can be sold in an orderly manner in
such offering within a price range acceptable to the holders of a
majority of the shares of Registrable Securities initially
requesting registration, the Company will include in such
registration, prior to the inclusion of any Other Securities, the
number of shares of Registrable Securities requested to be
included which in the opinion of such underwriters can be sold in
an orderly manner within the price range of such offering,
allocated pro rata among the respective holders thereof on the
basis of the number of shares of Registrable Securities which
each such holder has requested the Company to include in such
registration.
(iv) Selection of Underwriter. The holders of a majority of the shares
------------------------
of Registrable Securities to be included in a registration will
have the right to designate an underwriter to co-manage the
offering being registered under the Demand registration, subject
to the Company's approval which will not be
3
<PAGE>
unreasonably withheld or delayed. The Company will designate the
lead-managing underwriter of the offering.
(b) "Piggy-Back" Registrations.
--------------------------
If at any time the Company shall determine to register any of its
Common Stock under the Securities Act, whether in connection with a public
offering by the Company, a public offering by shareholders, or both, including,
without limitation, by means of any shelf registration pursuant to Rule 415
under the Securities Act or any similar rule or regulation, but other than a
Demand Registration or a registration to implement an employee benefit or
dividend reinvestment plan, the Company shall promptly give written notice
thereof to the Investor who shall be the registered holder(s) of Registrable
Securities and shall use its reasonable efforts to effect the registration under
the Securities Act of such Registrable Securities as may be requested in a
writing delivered to the Company within 30 days after such notice by the
Investor as well as to include such Registrable Securities in any notifications,
registrations or qualifications under any state securities laws which shall be
made or obtained with respect to the securities being registered by the Company;
provided, however, that (a) any distribution of Registrable Securities pursu-ant
- -------- -------
to such registration shall be managed by the investment banking firm, if any,
managing the distribution of the securities being offered by the Company on the
same terms as all other securities to be registered, and (b) the Company shall
not be required under this Section 3(b) to include Registrable Securities in any
registration of securities if the Company shall have been advised by the
investment banking firm managing the offering of the securities proposed to be
registered by the Company or others that the inclusion of Registrable Securities
in such offering would substantially interfere with the orderly sale of such
securities which the Company or others propose to register; provided, however,
that in making any determination under this subparagraph (b) as to the inclusion
of the Registrable Securities in any such offering, Registrable Securities shall
be registered on a pro-rata basis with any other securities as to which the
Company has granted or may in the future grant registration rights.
(c) Registration Expenses.
----------------------
All expenses of any registration and offering of Registrable
Securities pursuant to this Section 3 (including, without limitation,
registration fees, and disbursements of the Company's counsel, fees for listing
the Registrable Securities on any exchange on which similar securities of the
Company are listed for trading or on the NASDAQ/AMEX Stock Market) shall be
borne by the Company provided, however, that the expenses of any Demand
Registration made within one year of the date of this Agreement shall be paid by
the holders of the Registrable Securities. The Company shall pay underwrit-ing
discounts or commissions payable with respect to the sale of the Registrable
Securities, the fees and disbursements of the separate counsel for the holders
of Registrable Securities and related transfer taxes in an aggregate amount not
to exceed $20,000.
4
<PAGE>
4. Registration Procedures.
------------------------
(a) In connection with any registration pursuant to Section 3 hereof, the
Company will prepare and file with the SEC, a Registration Statement, and any
amendments and supplements thereto, on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate, and use its
reasonable best efforts to cause such Registration Statement to become
effective; provided that before filing with the SEC a Registration Statement or
--------
prospectus or any amendments or supplements thereto, the Company will (i)
furnish to the Investor and counsel selected by the Investor copies of all such
documents proposed to be filed, which documents will be subject to the review
and comment by the Investor and such counsel, and (ii) notify the Investors of
any stop order issued or threatened by the SEC and take all reasonable actions
required to prevent the entry of such stop order or to remove it if entered. The
Company will also (i) promptly notify the Investor of the effectiveness of such
Registration Statement, (ii) furnish to the Investor such number of copies of
such Registration Statement, and each amendment and supplement thereto, the
Prospectus included in such Registration Statement and such other documents as
the Investor may reasonably request; (iii) use its reasonable best efforts to
register or qualify such securities to be registered under such other securities
or blue sky laws of such jurisdictions as any Purchaser reasonably requests;
(iv) use its reasonable best efforts to cause all such securities to be
registered to be listed on each securities exchange on which similar securities
issued by the Company are then listed for trading or on the NASDAQ/AMEX Stock
market, and to provide a transfer agent and registrar for such securities to be
registered no later than the effective date of such Registration Statement; (v)
enter in to such customary agreements (including an underwriting agreement in
customary form) and take all such other actions as the Investor or the
underwriters retained by the Investor, if any, reasonably request in order to
expedite or facilitate the disposition of such securities to be registered,
including customary indemnification; and (vi) otherwise use its reasonable
efforts to comply with all applicable rules and regulations of the SEC and the
states and make available to the Investor as soon as reasonably practicable (but
not more than eighteen months) after the effective date of the registration
Statement, an earnings statement that satisfies the provisions of Section 11(a)
of the Securities Act and the rules of the SEC thereunder. The Company shall
take all other actions reasonably necessary or advisable to enable the Investor
to consummate the disposition of any Registrable Securities pursuant to any
registration Statement and to comply with the Securities Act and the Exchange
Act in connection with any offer and sale of any Registrable Securities. The
terms of this Section 4 shall not require the Company to qualify as a foreign
corporation or as a dealer in securities or to execute or file any general
consent to service of process under the laws of any such jurisdiction where it
is not so subject.
(b) In connection with any effective Registration Statement filed pursuant
to this Agreement, the Company will immediately notify the holders of
Registrable Securities registered pursuant to the Registration Statement of the
happening of any event as a result of which the Registration Statement or any
Prospectus contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and will
promptly prepare and furnish to the holders of Registrable Securities a
5
<PAGE>
supplement or amendment to such prospectus so that the Registration Statement or
such Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing. Notwithstanding the foregoing, if the Company determines in its
reasonable business judgment that an amendment or supplement to the Registration
Statement or any such Prospectus would interfere with any material financing,
acquisition, corporate reorganization, or other material corporate transaction
or development involving the Company, the Company may delay the preparation and
filing of such amendment or supplement for a period of up to 60 days in the
aggregate in order to complete or make a public announcement with respect to
such material transaction or development (it being understood that the Company
shall be obligated to extend the period of time it is required to maintain in
effect any such Registration Statement to take into account the period of time
that such holders of Registrable Securities are unable to offer or sell
Registrable Securities by reason of this Section 4(c)).
5. Holdback Agreements.
---------------------
(a) Restrictions on Public Sale by Holders of Registrable Securities.
------------------------------------------------------------------
Each holder of Registrable Securities whose Registrable Securities are covered
by a Registration Statement filed pursuant to Section 3 hereof agrees, if
requested by the managing underwriters in an underwritten offering (to the
extent timely notified in writing by the Company or the managing underwriters),
not to effect any public sale or distribution of securities of the Company of
any class included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering), during the 10-day
period prior to, and the 90-day period beginning on, the effective date of any
Registration Statement.
(b) The foregoing provisions shall not apply to any holder of
Registrable Securities if such holder is prevented by applicable statute or
regulation from entering into any such agreement; provided, however, that any
-----------------
such holder shall undertake in its request to participate in any such
underwritten offering not to effect any public sale or distribution of the class
of Registrable Securities covered by such Registration Statement (except as part
of such underwritten offering) during such period unless it has provided five
(5) business days prior written notice of such sale or distribution to the
managing underwriter or underwriters.
6. Indemnification
---------------
(a) Indemnification by Company. The Company shall indemnify and hold
----------------------------
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act), and the partners, officers, directors, agents
or employees of any such controlling person, from and against all losses,
claims, damages, liabilities, costs (including, without limitation, all
reasonable attorneys' fees) and expenses (collectively, "Losses"), arising out
of or based upon any untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus, or arising out of
6
<PAGE>
or based upon any omission of a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made (in the case of any Prospectus) not misleading, except
insofar as the same are based solely upon information furnished to the Company
by such holder for use therein; provided, however, that the Company shall not be
-----------------
liable in any such case to the extent that any such Loss arises out of or is
based upon an untrue statement or omission made in any preliminary prospectus or
Prospectus if (i) such holder failed to send or deliver a copy of the Prospectus
or Prospectus supplement with or prior to the delivery of written confirmation
of the sale of Registrable Securities and (ii) the Prospectus or Prospectus
supplement would have corrected such untrue statement or omission.
(b) Indemnification by Holder of Registrable Securities. In connection
---------------------------------------------------
with any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities shall furnish to the
Company in writing such information concerning such holder and its proposed
disposition of Registrable Securities pursuant to such registration as the
Company may reasonably request for use in connection with any Registration
Statement or Prospectus. Each Investor shall indemnify and hold harmless, to
the full extent permitted by law, the Company, and its officers, directors,
agents and employees, each person who controls the Company (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents or employees of any such controlling person, from
and against all Losses arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus, or arising out of or based upon any omission of a material fact
required to be stated therein or necessary to make the statements therein in
light of the circumstances under which they were made (in the case of any
Prospectus) not misleading, to the extent, but only to the extent, that such
untrue statement or omission is contained in any information so furnished in
writing by such holder to the Company for use in such Registration Statement,
Prospectus or preliminary prospectus. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the Company
or any holder and any of their respective directors, officers, agents, employees
or controlling persons (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and shall survive the transfer of such
securities by such holder.
(c) Conduct of Indemnification Proceedings. If any action or
------------------------------------------
proceeding (including any governmental investigation or inquiry) shall be
brought or any claim shall be asserted against any person entitled to indemnity
hereunder (an "indemnified party"), such indemnified party shall promptly notify
the party from which such indemnity is sought (the "indemnifying party") in
writing, and the indemnifying party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses incurred in connection with the defense
thereof. All such fees and expenses (including any fees and expenses incurred
in connection with investigating or preparing to defend such action or
proceeding) incurred by the indemnified party, shall be paid to the indemnified
party, as incurred, within 20 days of written notice thereof to the indemnifying
party; provided, however, that if, in accordance with this Section 6, the
------------------
indemnifying party is not liable to the indemnified party, such fees and
expenses shall be returned promptly to the indemnifying party. Any such
indemnified party shall have the right to employ separate counsel in any such
action, claim or proceeding and to participate in the defense thereof, but the
7
<PAGE>
fees and expenses of such counsel shall be the expense of such indemnified party
unless (a) the indemnifying party has agreed to pay such fees and expenses, (b)
the indemnifying party shall have failed promptly to assume the defense of such
action, claim or proceeding and to employ counsel reasonably satisfactory to the
indemnified party in any such action, claim or proceeding, or (c) the named
parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties hereunder, unless in the
opinion of counsel for such indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such action, claim or proceeding, in which event the indemnifying
party shall be obligated to pay the fees and expenses of such additional counsel
or counsels). No indemnifying party will consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the release of such indemnified party from all liability in respect to
such claim or litigation without the written consent (which consent will not be
unreasonably withheld) of the indemnified party. No indemnified party shall
consent to entry of any judgment or enter into any set-tlement without the
written consent (which consent will not be unreasonably withheld) of the
indemnifying party from which indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
8
<PAGE>
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any registration are to be
sold in an underwritten offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by
the Company. The Investor may not participate in any underwritten registration
hereunder unless the Investor (i) agrees to sell the Investor's Registrable
Securities on the basis provided in the underwriting arrangements approved by
the Company, and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
9. Miscellaneous
-------------
(a) Amendments and Waivers. The provisions of this Agreement,
------------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company obtains the written consent of holders of at
least a majority of the then outstanding Registrable Securities affected by such
amendment, modification or supplement. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect to a matter which
relates exclusively to the rights of holders of Registrable Securities whose
securi-ties are being sold pursuant to a Registration Statement and which does
not directly or indirectly affect the rights of holders of Registrable
Securities whose securities are not being sold pursuant to such Registration
Statement may be given by holders of a majority of the Registrable Securities
being sold by such holders.
9
<PAGE>
(b) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next day air courier, telex, or telecopy: (i) if to a holder
of Registrable Securities, at the most current address given by such holder to
the Company in accordance with the provisions of this Section 9(b), which
address initially is, with respect to the Investor, the address set forth in
Section B of the Purchase Agreement; and (ii) if to the Company, at 900 Veterans
Boulevard, Suite 240, Redwood City California 94063, attention: Secretary, and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 8(b).
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; two business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being sent by next day air courier; when answered back, if telexed; and when
receipt acknowledged, if telecopied.
(c) Transfer of Registration Rights. The rights granted to the holders
-------------------------------
pursuant to this Agreement to cause the Company to register securities may not
be assigned or otherwise transferred in any way other than to an Affiliate of
the holder to whom the holder has transferred all or any part of the Warrant or
the Amended Note.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts by the parties hereto, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed
---------------
in accordance with the laws of the State of New York without regard to
principles of conflict of laws.
(g) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(h) Entire Agreement. This Agreement is intended by the parties to be
-----------------
a final expression of their agreement and a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties nor
10
<PAGE>
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the securities
sold pursuant to the Purchase Agreement. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(i) Attorneys' Fees. If any action or proceeding is brought to enforce
----------------
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees in addition to its costs and expenses and any other
available remedy.
IN WITNESS WHEREOF, the parties have executed this agreement as of December
14, 1998.
PENN OCTANE CORPORATION
By: ______________________________________
Ian T. Bothwell
Chief Financial Officer
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of December 14,
1998.
KFP Grand Ltd.
By: ____________________________________
Mahmood Khimji
President
12
<PAGE>
SCHEDULE I
Investors and Addresses
- -------------------------
KFP Grand Ltd. Shares Purchased: 500,000
545 E. John Carpenter Freeway, Suite 1400 Warrants: 300,000
Irving, Texas 75062
Attention: Mahmood Khimji
President
with a copy to:
Dudley Murrey, Esq.
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
1
<PAGE>
EXHIBIT 1
----------
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after December 13, 2003
Warrant to Purchase 300,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
KFP Grand LTD.
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on December 13, 2003 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 300,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.75 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<PAGE>
1. Exercise of Warrant. This Warrant may be exercised in whole or in
---------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office of the Company, in proper
form for exercise, accompanied by payment of the Exercise Price, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. The
issuance of certificates for shares of Common Stock upon the exercise of this
Warrant shall be made without charge to the Holder for any issuance tax in
respect thereof (with the exception of any federal or state income taxes
applicable thereto), all such taxes to be paid by the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder. The Company will at no
time close its transfer books against the transfer of this Warrant or the
issuance of any shares of Common Stock issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that at
---------------------------------------
all times there shall be authorized and reserved for issuance upon exercise of
this Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant. All shares which may be
issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable,
free of preemptive rights and any other rights of others.
3. Fractional Shares. This Warrant shall not be exercisable in such
------------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable, no
such fractional shares shall be issued. In lieu thereof, the Company shall pay
the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be the
last sale price on such day on the NASDAQ/AMEX Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ/AMEX Stock Market,
on such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the reported
closing bid and asked prices on such day in the over-the-counter market as
quoted on the National Association of Securities Dealers Automated Quotation
System or, if not so quoted, then as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company. If there shall
2
<PAGE>
be no meaningful over-the-counter market, then Fair Market Value shall be such
amount, not less than book value, as may be determined by the Board of Directors
of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
-------------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 11 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
-----------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
---------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
A. Adjustment for Change in Capital Stock. If at any time after the
-----------------------------------------
date hereof, the Company:
1. pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
2. subdivides its outstanding shares of Common Stock into a
greater number of shares;
3. combines its outstanding shares of Common Stock into a smaller
number of shares;
4. makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
5. issues by reclassification of its Common Stock any shares of
its capital stock;
3
<PAGE>
then the Exercise Price in effect immediately prior to such action and the
number of shares and type of capital stock issuable upon the exercise of this
Warrant shall be adjusted so that the Holder may receive, upon exercise or
exchange of this Warrant and payment of the same aggregate consideration as
provided herein and any proportionate part thereof upon any partial exercise of
this Warrant, the number of shares of capital stock of the Company which the
Holder would have owned immediately following such action if the Holder had
exercised or exchanged the Warrant immediately prior to the applicable record
date or effective date of such action.
The adjustment shall become effective immediately after the record date for
the determination of stockholders entitled to receive the dividend or
distribution in the case of a dividend or distribution and as of the effective
date of any subdivision, combination or reclassification.
B. Adjustment for Other Distributions. If at any time after the date
------------------------------------
hereof, the Company distributes to all holders of its Common Stock any of its
assets or its debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per share of
Common Stock on the record date of the distribution.
F = the aggregate fair market value (as conclusively determined by
the Board of Directors of the Company) on the record date
of the assets or debt security to be distributed divided by the
number of outstanding shares of Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions paid
out of consolidated current or retained earnings as shown on the books of the
Company and paid in the ordinary course of business.
C. When No Adjustment Required. No adjustment need be made for a
------------------------------
change in the par value of the Common Stock.
4
<PAGE>
D. Statement of Adjustments. Whenever the Exercise Price and number of
------------------------
shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by its
President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount and nature of the adjustment of the adjustment, the method by which such
adjustment was calculated (including a description hereunder), and the Exercise
Price and number of shares of Common Stock and/or description of the other
capital stock and number of shares of the other capital stock purchasable
hereunder after giving effect to such adjustment, and shall promptly cause
copies of such certificates to be mailed to the Holder.
E. No Adjustment Upon Exercise of Warrants. No adjustments shall be
------------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
F. No Adjustment for Small Amounts. Anything herein to the contrary
----------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of such adjustment shall be less than $.05 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to $.05 per share or more.
G. Common Stock Defined. Whenever reference is made in Section 6(a) to
--------------------
the issue of shares of Common Stock, the term "Common Stock" shall include any
equity securities of any class of the Company hereinafter authorized which shall
not be limited to a fixed sum or percentage in respect of the right of the
holders thereof to participate in dividends or distributions of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
Subject to the provisions of Section 7 hereof, however, shares issuable upon
exercise or exchange hereof shall include only shares of the class designated as
Common Stock of the Company as of the date hereof or shares of any class or
classes resulting from any reclassification or reclassifications thereof or as a
result of any corporate reorganization as provided for in Section 7 hereof.
7. Notice to Warrant Holders. So long as this Warrant shall be
----------------------------
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon its Common Stock, or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of stock or
securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of the
Company, or voluntary or involuntary dissolution or liquidation of the Company
shall be effected, then, in any such case, the Company shall cause to be mailed
to the Holder, at least thirty (30) days prior to the date specified in (x) or
(y) below, as the case may be, a notice containing a brief description of the
proposed action and stating the date which shall be (x) the record date for
determining the stockholders of the Company entitled to receive such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
5
<PAGE>
record shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution or liquidation.
8. Certain Obligations of the Company. The Company agrees that it will
----------------------------------
not increase the par value of the shares of Warrant Stock issuable upon exercise
of this Warrant above the prevailing and currently applicable Exercise Price
hereunder, and that before taking any action that would cause an adjustment
reducing the prevailing and current applicable Exercise Price hereunder below
the then par value of the Warrant Stock at the time issuable upon exercise of
this Warrant, the Company will take such corporate action, as in the opinion of
its counsel, may be necessary in order that the Company may validly issue fully
paid, nonassessable shares of such Warrant Stock upon the exercise of this
Warrant. The Company will maintain an office or agency (which shall initially
be the Company's principal office in Redwood City, California) where
presentations and demands to or upon the Company in respect of this Warrant may
be made and will give notice in writing to the registered holders of the then
outstanding Warrants, at their addresses as shown on the books of the Company,
of each change of location thereof.
9. Repurchase Right. Notwithstanding any other provisions of this
-----------------
Warrant, the Company may, in the event that, after the date six months after the
date hereof, the closing bid price, as reported on the NASDAQ/AMEX or such other
exchange on which the Company's Common Stock may then be quoted, of the
Company's Common Stock is greater than $3.00 for five consecutive trading days,
upon not less than ten (10) days' notice in writing to the Holder, repurchase
all or any portion of this Warrant at a purchase price equal to $.10 per share
of Common Stock covered hereby, such purchase price to be proportionally
adjusted each time the Exercise Price is adjusted pursuant to Section 6 hereof.
During such five (5) day period, the Holder may exercise such Warrant in
accordance with the terms hereof. The closing on such repurchase shall occur on
the date and at the time set forth in such notice at the office of the Company
in Redwood City, California or at such other place as shall be specified by the
Company. At the Closing, the Company shall deliver to the Holder an amount
equal to the purchase price in immediately available funds and the Holder will
deliver this Warrant to the Company for cancellation. To the extent any
repurchase hereunder is of less than all of the rights represented by this
Warrant, the Company will deliver to the Holder a new Warrant covering the
rights not so purchased.
10. Determination by Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
11. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
12. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants. Upon
------------------------------------------------------------
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond in such reasonable
amount as the Company may determine and in the case of any such mutilation, upon
6
<PAGE>
the surrender of such Warrant for cancellation, the Company at its expense, will
execute and deliver, in lieu of such lost, stolen, destroyed or mutilated
Warrant, a new Warrant of like tenor.
13. Number and Gender. Whenever the singular number is used herein,
-------------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
14. Applicable Law. This Warrant shall be governed by, and construed
---------------
in accordance with, the laws of the State of New York, without regard to its
conflict of law principles.
PENN OCTANE CORPORATION
By:
----------------------------------------
Jerome B. Richter
President and Chief Executive Officer
Dated: December 14, 1998
7
<PAGE>
PURCHASE FORM
--------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ___________ shares of Common Stock and hereby makes payment
of in payment of the exercise price thereof.
Signature______________________________
8
<PAGE>
SECOND AMNDMENT
---------------
OF THE
------
INTERIM OPERATING AGREEMENT
---------------------------
This Second Amendment of the Interim Operating Agreement (this "Second
Amendment") is made and entered into effective as of the __ day of December,
1998, by and among Wilson Technologies Incorporated, a California corporation
("WTI"), a wholly-owned subsidiary of Zimmerman Holding, Inc., a California
corporation ("ZHI"), and ZHI, on the one hand, and Wilson Acquisition
Corporation, a Delaware corporation ("WAC"), a wholly-owned subsidiary of Penn
Octane Corporation, a Delaware corporation ("POC"), and POC, on the other hand.
A. The above-named parties to this Second Amendment (the "Parties") are
parties to that certain Amendment of the Interim Operating Agreement dated as of
March 21, 1997 (the "First Amendment").
B. Pursuant to the First Amendment, the Parties terminated (i) that certain
Purchase Agreement dated March 7, 1997 among the Parties, and (ii) that certain
Interim Operating Agreement dated March 7, 1997 among the Parties, except to the
extent set forth in the First Amendment and in Paragraph 15 of the Purchase
Agreement.
C. Pursuant to Section 1 of the First Amendment WTI was to receive $xxxxxx
in the form of a note payable 20% per year with interest at the prime rate with
the first payment due June 5, 1998 (the "Note Payments"), and pursuant to
Section 6 of the First Amendment, WTI was to receive royalties as set forth in
such Section 6 (the "Royalty Payments").
D. The Parties desire to further amend the First Amendment and the Interim
Operating Agreement and to resolve all payment obligations between the Parties
in connection with the Note Payments and the Royalty Payments.
AGREEMENT
---------
THEREFORE, in consideration of the Recitals and the mutual covenants and
agreements contained herein, and contingent upon ZHI's timely receipt of the
"Stock" has hereinafter defined, it is agreed by and between the Parties that
the First Amendment and the Interim Operating Agreement, and further amended as
follows:
1. Modifications of First Amendment. Within ten (10) business day after the
--------------------------------
execution of this Second Amendment, WAC and POC shall deliver to ZHI 53,884 Rule
144 Shares of POC common stock issued in the name of ZHI (the "Stock") which
shall be accepted by ZHI and WTI in the full satisfaction and payment of the
following:
(a) The Note Payments now due or payable in the future, so that no
further payments shall be due or payable by WAC and/or POC and Section 1 of
-----
the First Amendment is modified to such extent; and
<PAGE>
(b) The Royalty Payments now due or payable in the future by WAC
and/or POC after giving effect and taking into consideration any and all
offsets to such Royalty Payments made through the date of this Second
Amendment, so that no further payments shall be due or payable and Section
6 of the First Amendment is modified to such extent.
It is acknowledged by the Parties that upon receipt of the Stock by ZHI,
the note Payments and the Royalty Payments will be deemed satisfied and pay
in full and WAC an/or POC shall not have any obligation to make any further
payments in connection with either the Note Payment or the Royalty Payments
and WAC and/or POC are not required to make any further payments in
connection with any agreement described herein. It is further acknowledged
that the determining the amount of the Stock the Parties have taken into
account the offsets made against the Royalty Payment up to the date of this
Second Amendment as set forth in Section 6 of the First Amendment and that
no payment or reimbursement for such offset shall be required because the
amount of the Stock is based upon the amounts due under the Note Payment
and the net amount currently due and payable under the Royalty Payment. The
Parties agree that, upon the execution of this Second Amendment by both
Parties, neither Party has any obligation to make any further payments to
the other Party.
2. Miscellaneous.
-------------
2.1 Attorneys' Fees. If any legal action or any arbitration or other
-----------------
proceeding is brought for the enforcement of this Second Amendment, or because
of an alleged dispute, breach, default or misrepresentation in connection with
any of the provisions of this Second Amendment, 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
the Party may be entitled.
2.2 Successors and Assigns. This Second Amendment shall be binding on
----------------------
and shall inure to the benefit of the heirs, administrators, representatives,
executors, successors and assigns of the Parties.
2.3 Time is of the Essence. Time is of the essence in the performance
----------------------
of each and every obligations to be performed by the Parties as set forth
herein.
2.4 Choice of Law. This Second Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of California (without regard
to conflicts of law principles).
2.5 Headings. The subject headings of the Section of this Second
--------
Amendment are included for purposes of convenience only and shall not affect the
construction or interpretation of any of this Second Amendment's provisions.
2
<PAGE>
2.6 Amendment. This Second Amendment shall not be amended or modified
---------
in any way without the written consent of all the Parties.
2.7 Counterparts. This Second Amendment may be executed in any number
------------
of counterparts, each of which shall be deemed an original, but all of which
shall together constitute a single agreement.
IN WITNESS WHEREOF, the Parties have caused this Second Amendment to be
executed effective as of the date first set forth above.
WAC
---
WILSON ACQUISITION CORPORATION, a Delaware corporation
By:
Title:
POC
---
PENN OCTANE CORPORATION,
A Delaware corporation
By:
Title:
WTI
---
WILSON TECHNOLOGIES INCORPORATED, a
California corporation
By:
Title:
[Signatures continued on next page]
3
<PAGE>
ZHI
---
ZIMMERMAN HOLDINGS, INC., a
California corporation
By:
Title:
4
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Penn Octane
Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 23723
<SECURITIES> 0
<RECEIVABLES> 2030664
<ALLOWANCES> 418796
<INVENTORY> 402366
<CURRENT-ASSETS> 2585020
<PP&E> 5677949
<DEPRECIATION> 1593893
<TOTAL-ASSETS> 7405989
<CURRENT-LIABILITIES> 7873388
<BONDS> 0
<COMMON> 99527
0
0
<OTHER-SE> (566926)
<TOTAL-LIABILITY-AND-EQUITY> 7502087
<SALES> 6502087
<TOTAL-REVENUES> 6502087
<CGS> 5884469
<TOTAL-COSTS> 5884469
<OTHER-EXPENSES> 662039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97268
<INCOME-PRETAX> (141271)
<INCOME-TAX> 0
<INCOME-CONTINUING> (141271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141271)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
