SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to__________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (650) 368-1501
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 1999 was $33,985,239. The last reported sale
price of the Registrant's Common Stock as reported on the Nasdaq SmallCap Market
on September 30, 1999 was $3.94 per share.
The number of shares of Common Stock, par value $.01 per share, outstanding
on September 30, 1999 was 12,720,497.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
ITEM PAGE NO.
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Part I 1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
7A. Quantitative and Qualitative Disclosures About Market Risks 28
8. Financial Statements and Supplementary Data 29
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 66
Part III 10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 68
12. Security Ownership of Certain Beneficial Owners and Management 74
13. Certain Relationships and Related Transactions 75
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 76
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PART I
The statements contained in this Annual Report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. These forward-looking statements may be identified by the use of
forward-looking terms such as "believes," "expects," "may," "will", "should" or
anticipates" or by discussions of strategy that involve risks and uncertainties.
From time to time, we have made or may make forward-looking statements, orally
or in writing. These forward-looking statements include statements regarding
anticipated future revenues, sales, operations, demand, competition, capital
expenditures, the deregulation of the LPG market in Mexico, the completion and
operations of the US - Mexico Pipeline, the Mexican Terminal Facilities and the
Saltillo Terminal Facilities, foreign ownership of LPG operations, credit
arrangements and other statements regarding matters that are not historical
facts, and involve predictions which are based upon a number of future
conditions that ultimately may prove to be inaccurate. Actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that may cause or
contribute to such differences include those discussed under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as those discussed elsewhere in this Annual Report. We
caution you, however, that this list of factors may not be complete.
ITEM 1. BUSINESS.
INTRODUCTION
Penn Octane Corporation (the "Company"), formerly known as International
Energy Development Corporation ("International Energy"), was incorporated in
Delaware in August 1992. The Company has been principally engaged in the
purchase, transportation and sale of liquefied petroleum gas ("LPG"). From 1997
until March 1999, the Company was also involved in the provision of equipment
and services to the compressed natural gas ("CNG") industry. The Company's CNG
capabilities included the design, packaging, construction, operation and
maintenance of CNG fueling stations. In May 1999, the Company discontinued
operation of its CNG business and most of the Company's CNG assets were sold.
The Company owns and operates a terminal facility in Brownsville, Texas (the
"Brownsville Terminal Facility") and has a long-term lease agreement for
approximately 132 miles of pipeline from certain gas plants in Texas to the
Brownsville Terminal Facility (the "Pipeline"). The Company sells its LPG
primarily to P.M.I. Trading Limited ("PMI"), which is the exclusive importer of
LPG into Mexico and a subsidiary of Petroleos Mexicanos, the state-owned Mexican
oil company ("PEMEX"), for distribution in the northeast region of Mexico.
On October 21, 1993, International Energy purchased 100% of the common
stock of Penn Octane Corporation, a Texas corporation, and merged it into
International Energy as a division. As a result of the merger, the Company
assumed the lease agreement with Seadrift Pipeline Corporation ("Seadrift")
relating to the Pipeline which connects Exxon Company, U.S.A.'s ("Exxon") King
Ranch Gas Plant in Kleberg County, Texas and Duke Energy's La Gloria Gas Plant
in Jim Wells County, Texas, to the Company's Brownsville Terminal Facility. In
January 1995, the Board of Directors approved the change of the Company's name
to Penn Octane Corporation.
The Company commenced commercial operations for the purchase, transport and
sale of LPG in July 1994 upon completion of construction of the Brownsville
Terminal Facility. The primary market for the Company's LPG is the northeast
region of Mexico, which includes the states of Coahuila, Nuevo Leon and
Tamaulipas. The Company believes it has a competitive advantage in the supply
of LPG for the northeast region of Mexico as a result of the geographic
proximity of its Brownsville Terminal Facility to consumers of LPG in such major
Mexican cities as Matamoros, Reynosa and Monterrey. Since 1994, the Company's
primary customer for LPG has been PMI. Sales of LPG to PMI accounted for 97%,
99% and 99% of the Company's total revenues for the fiscal years ended July 31,
1997, 1998 and 1999, respectively.
In March 1997, the Company, through its wholly-owned subsidiary PennWilson
CNG, Inc., a Delaware corporation ("PennWilson"), acquired certain assets,
including inventory, equipment and intangibles, from Wilson Technologies
Incorporated ("WTI"), a company formerly engaged in the design, construction,
installation and maintenance of turnkey CNG fueling stations, hired certain of
WTI's former employees and commenced operations for the provision of equipment
and services used in the CNG industry. In May 1999, the Company discontinued
operation of its CNG business and most of the Company's CNG assets were sold.
See note D to the Consolidated Financial Statements.
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The Company's principal executive offices are located at 900 Veterans
Boulevard, Suite 240, Redwood City, California 94063, and its telephone number
is (650) 368-1501. The offices of PennWilson are located at 12631 Imperial
Highway, Bldg. A, Suite 120, Santa Fe Springs, California 90670, and its
telephone number is (562) 929-1984. Effective November 1, 1999, the Company
will move its executive offices to Palm Desert, California.
LIQUEFIED PETROLEUM GAS
OVERVIEW. Since July 1994, the primary business of the Company has been
the purchase, transportation and sale of LPG. LPG is a mixture of propane and
butane principally used for residential and commercial heating and cooking.
Propane is also widely used as a motor fuel.
The primary market for the Company's LPG is the northeast region of Mexico,
which includes the states of Coahuila, Nuevo Leon and Tamaulipas. Mexico is the
largest market for LPG in the world. LPG is the most widely used domestic fuel
in Mexico and is the primary energy source for Mexican households using such
domestic fuels. Domestic consumption of LPG in Mexico increased from an average
of 362 million gallons per month in 1998 to an average of 382 million gallons
per month from January 1, 1999 to September 30, 1999, an estimated annual
increase of 5.5%. The future of LPG in Mexico continues to favor the Company
for the following reasons: i) as Mexico's domestic consumption of LPG
increases, Mexico's domestic production of LPG is expected to decline, ii)
limited sources of competitive LPG supply for importation into Mexico, iii) the
Mexican government's current plans to deregulate the LPG industry, iv) the
expanding use of propane as an automotive fuel, and v) the location of
Mexico's major domestic LPG production which is in the southeastern region of
Mexico combined with the lack of pipeline infrastructure within Mexico from
those production centers, resulting in higher distribution costs to transport
the LPG to areas where consumption is heaviest including the central, northern
and Pacific coast regions of Mexico.
The Company has been able to successfully compete with other LPG suppliers
in the provision of LPG to customers in northeast Mexico primarily as a result
of the Pipeline and the geographic proximity of its Brownsville Terminal
Facility to consumers of LPG in such major cities as Matamoros, Reynosa and
Monterrey. Prior to the commencement of operations by the Company at its
Brownsville Terminal Facility in 1994, LPG exports to northeast Mexico from the
United States had been transported by truck and rail primarily through Eagle
Pass, Texas which is approximately 240 miles northwest of Brownsville. The
Company's Brownsville Terminal Facility provides significantly reduced trucking
distances than Ciudad Madero and Piedras Negras, the principal LPG supply
centers (other than Brownsville) used by PMI, to points of distribution in
northeast Mexico. The Company's Brownsville Terminal Facility is approximately
331 miles closer to Matamoros than either Ciudad Madero or Piedras Negras, and
approximately 57 miles closer to Monterrey than Piedras Negras. Upon the
completion of the Company's LPG expansion program (see "LPG Expansion Program"
below), the Company believes that it will further enhance its strategic position
for the supply of LPG in Mexico.
THE BROWNSVILLE TERMINAL FACILITY. The Company's Brownsville Terminal
Facility occupies approximately 31 acres of land located adjacent to the
Brownsville Ship Channel, a major deep-water port serving northeastern Mexico,
including the city of Monterrey, and southeastern Texas. Total rated storage
capacity of the Brownsville Terminal Facility is approximately 675,000 gallons
of LPG. The Brownsville Terminal Facility includes eleven storage and mixing
tanks, four mixed product truck loading racks, one specification product propane
loading rack and two racks capable of receiving LPG delivered by truck. The
truck loading racks are linked to a computer-controlled loading and remote
accounting system. The Brownsville Terminal Facility also contains a railroad
spur, which the Company expects to have operational during the first six months
of fiscal 2000, primarily to supply LPG to the Saltillo, Mexico region by way of
railroad (see "LPG Expansion Program" below).
The Company leases the land on which the Brownsville Terminal Facility is
located from the Brownsville Navigation District (the "District") under a lease
agreement (the "Brownsville Lease") that expires on October 15, 2003. The
Brownsville Lease contains a pipeline easement to the Brownsville Navigation
District oil dock.
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The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment (as defined below).
The Brownsville Lease provides, among other things, that if the Company complies
with all the conditions and covenants therein, the leasehold improvements made
to the Brownsville Terminal Facilities by the Company may be removed from the
premises or otherwise disposed of by the Company at the termination of the
Brownsville Lease. In the event of a breach by the Company of any of the
conditions or covenants of the Brownsville Lease, all improvements owned by the
Company and placed on the premises shall be considered part of the real estate
and shall become the property of the District.
THE PIPELINE. The Company has a lease agreement (the "Pipeline Lease")
with Seadrift, a subsidiary of Union Carbide Corporation ("Union Carbide"), for
approximately 132 miles of pipeline which connects Exxon's King Ranch Gas Plant
in Kleberg County, Texas and Duke Energy Corporation's La Gloria Gas Plant in
Jim Wells County, Texas, to the Company's Brownsville Terminal Facility. As
provided for in the Pipeline Lease, the Company has the right to use the
Pipeline solely for the transportation of LPG and refined products belonging
only to the Company and not to any third party.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Amendment") entered into between the Company and
Seadrift on May 21, 1997, which became effective on January 1, 1999 (the
"Effective Date"). The Pipeline Lease Amendment provides, among other things,
for additional storage access and inter-connection with another pipeline
controlled by Seadrift, thereby providing greater access to and from the
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, less
certain adjustments during the first two years from the Effective Date and the
Company is required to pay for a minimum volume of storage of $300,000 per year,
beginning the second year from the Effective Date. In addition, the Pipeline
Lease Amendment provides for variable rental increases based on monthly volumes
purchased and flowing into the Pipeline and storage utilized. The Company
believes that the Pipeline Lease Amendment provides the Company increased
flexibility in negotiating sales and supply agreements with its customers and
suppliers. The Company has made all payments required under the Pipeline Lease
Amendment.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1999, the Company sold 117.0 million gallons of LPG which flowed
through the Pipeline. The Company can increase the Pipeline's capacity through
the installation of additional pumping equipment. (See "LPG Expansion Program"
below.)
In connection with the Company's LPG expansion program (see "LPG Expansion
Program" below), the Company intends to obtain additional lease extensions for
the Pipeline, which would enable the Company to maintain its LPG business beyond
the term of the Pipeline Lease Amendment.
DISTRIBUTION. Historically, all of the LPG from the Pipeline has been
delivered to the Company's customers at the Brownsville Terminal Facility and
then transported by truck to the U.S. Rio Grande Valley and northeast Mexico by
the customers. The Company is currently completing an expansion program (see
"LPG Expansion Program" below), to construct extensions to the Pipeline from the
Brownsville Terminal Facility to the railroad spur located at the Brownsville
Terminal Facility. This would enable the Company to supply LPG by railcar to
customers in Mexico, the United States or elsewhere. Through the Lease
Agreements (see "LPG Expansion Program" below) the Company is also constructing
a terminal facility in Matamoros, Mexico and a pipeline to connect such a
terminal facility with the Brownsville Terminal Facility. This will enable the
Company to transport LPG by pipeline directly into northeast Mexico for
subsequent sale and distribution by truck from the Matamoros terminal facility.
The Company is also constructing a terminal facility in Saltillo, Mexico which
will enable the Company to deliver LPG from the Brownsville Terminal Facility by
railcar to the Saltillo terminal facility for subsequent distribution by truck.
The Company owns 14 trailers, which are approved for the transport of
petrochemicals over U.S. roadways. These trailers have been used to transport
LPG on behalf of PMI from the Brownsville Terminal Facility to points of
distribution in northeast Mexico.
Since November 1997, the Company has been in a lease arrangement with Auto
Tanques Nieto ("Nieto") to lease the Company's trailers to be used in connection
with transporting LPG from the Brownsville Terminal Facility to points of
distribution in Mexico. Nieto is one of Mexico's largest transportation
companies and provides transportation services to PMI for the LPG purchased from
the Company.
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LPG SALES AGREEMENT. Since July 1994, the Company has been a supplier of
LPG to PMI, which, under current Mexican law, has exclusive responsibility for
importing LPG into Mexico. PMI is the Company's largest customer, with sales of
LPG to PMI accounting for 97%, 99% and 99% of the Company's total revenues for
the fiscal years ended July 31, 1997, 1998 and 1999, respectively. The Company
and PMI entered into a sales agreement (the "PMI Sales Agreement") for the
period from October 1, 1998 through September 30, 1999, under which PMI has
committed to purchase from the Company a minimum volume of LPG each month, mixed
to PMI's specifications, subject to seasonal variability, with a total committed
minimum annual volume of 69.0 million gallons, similar to minimum volume
requirements under the previous sales agreement with PMI effective during the
period from October 1, 1997 through September 30, 1998. During June 1999, the
PMI Sales Agreement was amended (the "PMI Sales Agreement Amendment") to extend
the expiration date to March 31, 2000 and to provide the Company with additional
margins for any volume exceeding 7.0 million gallons per month during the summer
period (April - September) and 9.0 million gallons per month during the winter
period (October - March). Under the PMI Sales Agreement Amendment, PMI is
obligated to purchase a minimum volume of 45.0 million gallons during October
1999 through March 2000. Under the PMI Sales Agreements during the periods from
October 1, 1997 through September 30, 1998, and October 1, 1998 through
September 30, 1999, actual volume sold was 94.0 million gallons and 124.0
million gallons, respectively, an increase over the committed minimum
requirements under the PMI Sales Agreements of 36% and 80%, respectively.
Historically, the Company and PMI have renewed the PMI Sales Agreement
prior to expiration. The Company intends to negotiate a renewal of the current
PMI Sales Agreement prior to the expiration of that agreement.
LPG EXPANSION PROGRAM. On July 26, 1999, the Company was granted a permit
by the United States Department of State authorizing the Company to construct,
maintain and operate two pipelines (the "US Pipeline") crossing the
international boundary line between the United States and Mexico (from the
Brownsville Terminal Facilities near the Port of Brownsville, Texas and El
Sabino, Mexico) for the transport of LPG and refined products (motor gasoline
and diesel fuel) [the "Refined Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V.
("PennMex"), an affiliated company (see "Foreign Ownership of LPG Operations"),
received a permit from the Comision Reguladora de Energia (the "Mexican Energy
commission") to build and operate one pipeline to transport LPG (the "Mexican
Pipeline") [collectively, the US Pipeline and the Mexican Pipeline are referred
to as the "US-Mexico Pipeline"] from El Sabino (at the point north of the Rio
Bravo) and to a terminal facility in the City of Matamoros, State of Tamaulipas,
Mexico (the "Mexican Terminal Facilities").
As a result of the above, the Company will be able to transport LPG
directly from the US into Mexico through the US-Mexico Pipeline and to the
Mexican Terminal Facilities (the "Expansion"). Management believes that as a
result of the Expansion, the Company will have additional strengths due to its
ability to: i) penetrate further into Mexico, ii) provide greater volumes of LPG
as a result of reduced cross border trucking delays and greater access to
Mexican distribution resources, and iii) the potential to achieve greater
margins on its LPG sales.
In addition to the Expansion, Tergas has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") for an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG. As a result of the
Saltillo Terminal Facilities, the Company believes that it will be able to
further penetrate the Mexican market for the sale of LPG. Initially, the Company
believes that the Saltillo Terminal Facilities, when complete, will generate
additional sales of 5.0 million gallons monthly, independent of the Expansion.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas") an affiliated Company (see
"Foreign Ownership of LPG Operations"), was formed for the purpose of operating
LPG terminal facilities in Mexico, including the Mexican Terminal Facilities and
the planned Saltillo Terminal Facilities. The Company anticipates that Tergas
will be issued the permit to operate the Mexican Terminal Facilities.
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In connection with the Expansion and the Saltillo Terminal Facilities, the
Company is also in the process of completing upgrades at the Brownsville
Terminal facility (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements"). Among
other things, the Terminal Upgrades will include the installation of additional
piping to connect the Pipeline to the loading dock at the railroad spur located
at the Brownsville Terminal Facility and construction of railcar loading
facilities to enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities. The Company
expects the Terminal Upgrades to be completed by December 1999 at a total cost
of approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo Terminal Facilities, the Company will be able to distribute LPG to
Mexico by railcars, which will directly link the Company's Brownsville Terminal
Facility and the Saltillo Terminal Facilities.
The Pipeline Enhancements will include the installation of additional
piping, meters, valves, analyzers and pumps along the Pipeline to increase the
capacity of the Pipeline and make the Pipeline bi-directional. The Pipeline
Enhancements will increase the capacity of the Pipeline to 360 million gallons
per year, and will provide the Company with access to a greater number of LPG
suppliers and additional storage facilities. The Company expects to begin the
Pipeline Enhancements in January 2000 and expects to be completed three months
thereafter at a cost of approximately $1.5 million.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended ("the Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico Pipeline (including an additional pipeline to accommodate Refined
Products) and the Mexican Terminal Facilities and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company will pay monthly
rentals of approximately $157,000, beginning the date that the US-Mexico
Pipeline and Mexican Terminal Facilities are physically capable to transport and
receive LPG in accordance with technical specifications required (the
"Substantial Completion Date"). In addition the Company has agreed to provide a
lien on certain assets, leases and contracts, which are currently pledged to RZB
Finance, L.L.C. ("RZB") and provide CPSC with a letter of credit of
approximately $1.0 million. The Company is currently in negotiations with RZB
and CPSC concerning RZB's subordination of RZB's lien on certain assets, leases
and contracts. The Company also has the option to purchase the US-Mexico
Pipelines and the Mexican Terminal Facilities at the end of the 10th year
anniversary and 15th year anniversary for $5.0 million and $100,000,
respectively. Under the terms of the Lease Agreements, CPSC is required to pay
all costs associated with the construction and maintenance of the US-Mexico
Pipeline and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC
agreed to accept 500,000 shares of common stock of the Company owned by the
President of the Company (the "Collateral") in place of the letter of credit
originally required under the Lease Agreements. The Collateral shall be
replaced by a letter of credit or cash collateral over a ten month period
beginning monthly after the Substantial Completion Date. In addition, the
Company has agreed to guaranty the value of the Collateral based on the fair
market value of the Collateral for up to $1.0 million.
For financial reporting purposes, the Lease Agreements are capital leases.
Therefore the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date (see note N to the Consolidated
Financial Statements).
On September 16, 1999, the Company and CPSC entered into a purchase and
option agreement whereby the Company will purchase a 30% interest (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for $3.0 million. In connection with the Purchased Interests, the Company will
not assume any costs associated with CPSC's obligations under the Lease
Agreements until the Substantial Completion Date is reached, and the Company
will receive a minimum of $54,000 per month from the Company's payments under
the Lease Agreements (approximately 34% of the Company's monthly lease
obligations under the Lease Agreements). The Company is required to pay for the
Purchased Interests on January 3, 2000, or 10 days subsequent to the Substantial
Completion Date, whichever is later (the "Closing Date"). To secure the payment
of the $3.0 million for the Purchased Interests, the Company has agreed to
assign its interest in the net cash proceeds to be received from the
IBC-Brownsville award judgment (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings"). In the event that the net cash received from
the Judgment is less than $3.0 million, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
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Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2.0 million and $7.0 million, respectively, within 90 days from the Closing
Date. In the event the Company exercises the additional 20% option, then the
Purchase Interests will total 50% and the Company will receive a minimum of
$90,000 per month from the Company's payments under the Lease Agreements
(approximately 57% of the Company's monthly lease obligations under the Lease
Agreements). The Company paid $50,000 to obtain the Options.
The actual costs to complete the US-Mexico Pipeline and Mexican Terminal
Facilities are the sole responsibility of CPSC ("the Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
PennMex and/or Tergas are currently the owners of the land which is being
utilized for the Mexican Pipeline and Mexican Terminal Facilities, own the
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipeline and have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities. In addition, the Company has advanced funds to PennMex
and/or Tergas in connection with the purchase of assets associated with the
Mexican Pipeline, Mexican Terminal Facilities and the Saltillo Terminal
Facilities (see note O to the Consolidated Financial Statements).
FOREIGN OWNERSHIP OF LPG OPERATIONS. Both PennMex and Tergas are Mexican
companies, which are owned 90% and 95%, respectively, by Jorge R. Bracamontes,
an officer and director of the Company ("Bracamontes") and the balance by other
Mexican citizens ("Minority Shareholders"). Under current Mexican law (see
"Deregulation of the LPG Market in Mexico" below), foreign ownership of Mexican
entities involved in the distribution of LPG and the operation of LPG terminal
facilities are prohibited. However, foreign ownership is permitted in the
transportation and storage of LPG. In October 1999, the Company received a
verbal opinion from the Foreign Investment Section of the Department of Commerce
and Industrial Development ("SECOFI"), that the Company's planned strategy of
selling LPG to PMI at the US border and then transporting the LPG through the
Mexican portion of the US - Mexico Pipeline to the Mexican Terminal Facilities
would comply with the LPG regulations. The Company intends to request a ruling
(the "Ruling") from SECOFI confirming the verbal opinion. There is no certainty
that the Company will obtain the Ruling, and if obtained, that the Ruling will
not be affected by future changes in Mexican laws.
The Company, Bracamontes and the Minority Shareholders have entered into
agreements whereby the Company may acquire up to 75% of the outstanding shares
of PennMex for a nominal amount, subject to among other things, the receipt of
the Ruling. The Company intends to contract with Tergas for services to be
performed by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entitles comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
DEREGULATION OF THE LPG MARKET IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Articulo 27 Constitutional en el Ramo
del Petroleo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Orgonica del
Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petroleos
Mexicanos and Subsidiary Entities (the "Organic Law")). Under Mexican law and
related regulations, PEMEX is entrusted with the central planning and the
strategic management of Mexico's petroleum industry, including importation,
sales and transportation of LPG. In carrying out this role, PEMEX controls
pricing and distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in LPG activities related to transportation and storage. Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Accordingly, the Company expects to sell LPG directly to
independent Mexican distributors as well as PMI. Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG prior to
entering into contracts with the Company.
8
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Pursuant to the PMI Sales Agreement upon Deregulation by the Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales Agreement. Depending on the outcome of any such renegotiation, the
Company expects to either (i) enter into contracts directly with independent
Mexican LPG distributors located in the northeast region of Mexico, or (ii)
modify the terms of the PMI Sales Agreement to account for the effects of
Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal
Facility. Upon the completion of the US - Mexico Pipeline and Mexican Terminal
Facilities, the Company will sell LPG to PMI at the U.S. border and transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as to PMI.
LPG SUPPLY. Historically, the Company has purchased LPG from Exxon, mixed
to PMI's specifications, at variable posted prices below those provided for in
the PMI Sales Agreement thereby providing the Company with a fixed margin over
the cost of LPG. From June 1995 to July 1996, and from November 1, 1996 to
early November 1997, PMI purchased LPG from Exxon on the Company's behalf under
the terms of the Company's supply agreement with Exxon. PMI invoiced the
Company for the LPG at the price paid to Exxon and title to the LPG passed to
the Company as the LPG entered the Pipeline. In October 1997, the Company
obtained a $6.0 million credit facility (the "RZB Credit Facility") with RZB
which was increased to $10.0 million during October 1999, and which can be
terminated at any time by RZB. As a result of the RZB Credit Facility, PMI no
longer provides any financing on behalf of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit Arrangements." 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.
Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered into a ten year LPG supply contract (the "Exxon Supply Contract"),
whereby Exxon has agreed to supply and the Company has agreed to take, the
supply of propane and butane available at Exxon's King Ranch Gas Plant (the
"Plant") which is estimated to be between 10.1 million gallons per month and
13.9 million gallons per month blended in accordance with the specifications
outlined under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of 10.1 million gallons per month guaranteed by Exxon to be provided to the
Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7.7 million gallons into the CCPL
during the first quarter from the date that the CCPL is operational,
approximately 92 million gallons the following year and 122 million gallons each
year thereafter and continuing for four years.
The Exxon Supply Contract currently requires that the Company purchase a
minimum supply of LPG, which is significantly higher than committed sales
volumes under the PMI Sales Agreement. In addition, the Company is required to
pay additional fees associated with the Additional Propane Supply, which will
increase its LPG costs by a minimum of $.01 per gallon without considering the
actual cost of the Additional Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement")
whereby PG&E has agreed to supply and the Company has agreed to take, a monthly
average of 2.5 million gallons (the "PG&E Supply") of propane. In addition,
PG&E is in the process of obtaining up to 3.8 million gallons per month of
additional propane commitments, which if successful by December 31, 1999, will
be an adjustment to the PG&E Supply. Under the PG&E Supply Agreement, the
Company is not obligated to purchase the PG&E Supply until the CCPL is
operational, anticipated to be during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to the CCPL, as described above, and blended to the proper
specifications as outlined under the PMI Sales Agreement. In addition, by
utilizing the PG&E Supply, the Company would satisfy the CCPL Supply
requirements under the Exxon Supply Contract.
In connection with the Plant Commitment and the PG&E Supply, the Company
anticipates lower gross margins on its sales of LPG under the PMI Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous agreements to purchase LPG. The Company may incur significant
additional costs associated with storage, disposal and/or changes in LPG prices
resulting from the excess of the Plant Commitment and PG&E Supply over actual
sales volumes.
9
<PAGE>
The Company believes that the terms of the Exxon Supply Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the increase in the costs for LPG over previous agreements will be
offset by increased sales margins on LPG sold to the Company's customers. The
Company further believes that any additional costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms as favorable as the PMI Sales Agreement. In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur significant losses as a result of not being able to meet
its minimum purchase requirements under the Exxon Supply Contract and the PG&E
Supply Contract and/or the costs of LPG may be in excess of prices received on
sales of LPG.
Furthermore, until the US-Mexico Pipeline and Mexican Terminal Facilities
and Saltillo Terminal Facilities are completed, the Company will be required to
deliver the minimum monthly volumes from its Brownsville Terminal Facility.
Historically, sales of LPG from the Brownsville Terminal Facilities have not
exceeded 11.1 million gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.
Under the terms of the Exxon Supply Contract and the PG&E Supply Contract,
the Company must provide letters of credit in amounts equal to the cost of the
product purchased. The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are significantly higher than historical
amounts. In addition, the cost of the product purchased is tied directly to
overall market conditions. As a result, the Company's existing letter of credit
facility may not be adequate and the Company may require additional sources of
financing to meet the letter of credit requirements under the Exxon Supply
Contract and the PG&E Supply Agreement. Furthermore, upon the implementation of
Deregulation the Company anticipates entering into contracts with Mexican
customers which require payments in pesos. In addition, the Mexican customers
may be limited in their ability to provide adequate financing.
The LPG purchased from Exxon and/or PG&E is delivered to the Company at the
opening of the Pipeline in Kleberg County, Texas, and then transported through
the Pipeline to the Brownsville Terminal Facility.
As a result of the Exxon Supply Contract and the PG&E Supply Contract, the
Company believes that it has an adequate supply of LPG to satisfy the
requirements of PMI under the PMI Sales Agreement and to meet its future sales
obligations, if any, upon the expiration of the PMI Sales Agreement. Due to the
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to achieve higher margins on the sale of
LPG in the future.
The Company is also able to purchase LPG from suppliers other than Exxon
and/or PG&E for distribution through the Pipeline. In determining whether any
other suppliers 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 Amendment.
COMPETITION
LPG. The Company competes with several major oil and gas and trucking
companies for the export of LPG from Texas to northeastern Mexico. In many
cases, these companies own or control their LPG supply and have significantly
greater financial and human resources than the Company.
The Company competes in the supply of LPG on the basis of price. As such,
LPG providers who own or control their LPG supply may have a competitive
advantage over the Company. However, in connection with the Exxon Supply
Contract and the PG&E Supply Agreement, the Company believes that it has control
over a significant amount of LPG supply.
10
<PAGE>
Pipelines generally provide a relatively low-cost alternative for the
transportation of petroleum product; however, at certain times of the year,
trucking companies may reduce their rates to levels lower than those charged by
the Company. The Company believes that such reductions are limited in both
duration and volumes and that on an annualized basis the Pipeline and when
completed, the US-Mexico Pipeline, will provide a transportation cost advantage
over the Company's competitors who utilize truck transportation.
The Company believes that its Pipeline and the location of the Brownsville
Terminal Facility and the successful implementation of the Expansion and the
Saltillo Terminal Facilities, leave it well positioned to successfully compete
for LPG supply contracts with PMI and upon deregulation of the Mexican LPG
market with local distributors in northeast Mexico.
ENVIRONMENTAL AND OTHER REGULATIONS
The operations of the Company are subject to certain federal, state and
local laws and regulations relating to the protection of the environment, and
future regulations may impose additional requirements. Although the Company
believes that its operations are in compliance with applicable environmental
laws and regulations, because the requirements imposed by environmental laws and
regulations are frequently changed, the Company is unable to predict with
certainty the ultimate cost of compliance with such requirements and its effect
on the Company's operations and business prospects.
The Company's Brownsville Terminal Facility operations are subject to
regulation by the Texas Railroad Commission. The Company believes it is in
compliance with all applicable regulations of the Texas Railroad Commission.
In connection with the construction and operation of the US-Mexico Pipeline
and the Mexican Terminal Facilities, the Company is not responsible for ensuring
that it is in compliance with applicable US and/or Mexican laws. CPSC has
assumed all the responsibility for constructing and operating the US-Mexico
Pipeline and Mexican Terminal Facilities in accordance with applicable laws and
regulations. The Company believes and CPSC has represented that the current
designs for the construction and operation of the US-Mexico Pipeline and Mexican
Terminal Facilities will be in compliance with all applicable US and/or Mexican
laws. However, there can be no assurance that these laws will not change in the
future, or if such a change were to occur, that the ultimate cost of compliance
with such requirements and its effect on the Company's operations and business
prospects would not be significant.
EMPLOYEES
As of July 31, 1999, the Company had 16 employees, including two in
finance, seven in sales and administration, and seven in production. In
addition, the Company occasionally retains subcontractors and consultants in
connection with its operations.
The Company has not experienced any work stoppages and considers relations
with its employees to be satisfactory.
11
<PAGE>
ITEM 2. PROPERTIES.
As of July 31, 1999, the Company owned or leased the following facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASED OR
LOCATION TYPE OF FACILITY SIZE OWNED
<S> <C> <C> <C>
Brownsville, Texas Pipeline and Storage Facility, On-site 31 acres Leased(1)(2)
Administrative Offices
Brownsville, Texas Brownsville Terminal Facility Building 19,200 square feet Owned(1)(2)
Extending from Kleberg Seadrift Pipeline 132 miles Leased(2)(3)
County, Texas to Cameron
County, Texas
Santa Fe Springs, Administrative Offices 1,500 square feet Leased(2)(4)
California
Redwood City, California Penn Octane Corporation Headquarters 1,559 square feet Leased(2)(5)
<FN>
________________
(1) The Company's lease with respect to the Brownsville Terminal Facility
expires on October 15, 2003.
(2) Pursuant to a $10.0 million credit facility, the Company has granted a
mortgage security interest and assignment in any and all of the Company's
real property, buildings, pipelines, fixtures, and interests therein,
including, without limitation, the lease agreement with the Navigation
District of Cameron County, Texas, and the Pipeline Lease (the "Liens"). In
connection with the Lease Agreements, the Company is negotiating the
assignment of a portion and/or all of the Liens. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources - Credit Arrangements."
(3) The Company's lease with Seadrift expires December 31, 2013.
(4) The Company's lease with respect to the Santa Fe Springs, California
facilities expires October 31, 1999, at which time the Company will
continue to rent the facility on a month to month basis.
(5) The Company's lease with respect to its headquarters offices is in the name
of Jerome B. Richter, the Company's Chairman, President and Chief Executive
Officer. The lease expires October 31, 1999. Beginning November 1999, the
Company will relocate its headquarters offices to Palm Desert, California.
The lease expires October 31, 2002. The monthly lease payments are
approximately $3,000 a month.
</TABLE>
For information concerning the Company's operating lease commitments, see note N
to the Consolidated Financial Statements.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against the International Bank of Commerce-Brownsville
("IBC-Brownsville"), a Texas state banking association, seeking (i) either
enforcement of a credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly all of the Company's business and assets; (ii) declaratory relief
with respect to the credit facility; and (iii) an award for damages and
attorneys' fees. After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the "Judgment") confirming the arbitral award for $3.2 million 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. On December 30, 1998, the Court denied
the IBC-Brownsville request for rehearing. On February 16, 1999,
IBC-Brownsville filed a petition for review with the Supreme Court of Texas. On
May 10, 1999, the Company responded to the Supreme Court of Texas', request for
response of the Petitioner's petition for review. On May 27, 1999,
IBC-Brownsville filed a reply with the Supreme Court of Texas to the Company's
response of the Petitioner's petition for review. On June 10, 1999, the Supreme
Court of Texas denied the Petitioner's petition for review. During July 1999,
the Petitioner filed an appeal with the Supreme Court of Texas to rehear the
Petitioner's petition for review. On August 26, 1999, the Supreme Court of
Texas upheld its decision to deny the Petitioner's petition for review. As of
July 31, 1999, the net amount of the Judgment is approximately $3.9 million
which is comprised of (i) the original judgment, including attorneys' fees, (ii)
post-award interest, and (iii) cancellation of the note and accrued interest
payable to IBC-Brownsville, less attorneys' fees. There is no certainty that
IBC-Brownsville will not continue to seek other legal remedies against the
Judgment.
For the year ended July 31, 1999, the Company recognized a gain of
approximately $987,000, which represents the amount of the Judgment which was
recorded as a liability on the Company's balance sheet at December 31, 1998 (see
note S to the Consolidated Financial Statements). The remaining net amount of
the Judgment to be realized by the Company is approximately $3.9 million less
attorney's fees. The Company will recognize the remaining amount of the
Judgment when it realizes the proceeds associated with the Judgment.
On March 16, 1999, the Company settled in mediation a lawsuit with its
former chairman of the board, Jorge V. Duran. In connection therewith and
without admitting or denying liability the Company agreed to pay Mr. Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is to be paid by the Company's insurance carrier. Litigation costs totaled
$221,391. The Company has agreed to register the stock in the future.
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 to date by Amwest of
approximately $160,000 on claims made against the performance and payment bonds
in connection with services provided by suppliers, laborers and other materials
and work to complete the NYDOT contract (Vendors). These amounts were
previously recorded in the Company's balance sheet at the time of the complaint.
In addition, Amwest was seeking pre-judgment for any amounts ultimately paid by
Amwest relating to claims presented to Amwest against the performance and
payment bonds, but have not yet been authorized or paid to date by Amwest. In
May 1999, the Company and PennWilson reached a settlement agreement with Amwest
whereby Amwest will be reimbursed by PennWilson $160,000 for the payments, made
to the Vendors, with the Company acting as guarantor. Upon satisfactory
payment, Amwest will dismiss its pending claims related to the payment bond. On
October 12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant to the NYDOT contract. The Company is currently considering its legal
options and intends to vigorously defend against the claims made against the
performance bond but not yet paid by Amwest.
13
<PAGE>
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.
For further information concerning the aforementioned legal proceedings,
see note N of the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended July 31, 1999, the Company did not hold an annual
meeting of its stockholders. The Company intends to hold its next annual
meeting during the fiscal year ending July 31, 2000.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock began trading in the over-the-counter ("OTC")
market on the Nasdaq SmallCap Market under the symbol "POCC" in December 1995.
The following table sets forth the reported high ask and low bid quotations
of the common stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1998:
First Quarter. . . . . . . . . . $4.750 $7.000
Second Quarter . . . . . . . . . 4.250 6.063
Third Quarter. . . . . . . . . . 3.625 5.875
Fourth Quarter . . . . . . . . . 2.875 5.875
FISCAL YEAR ENDED JULY 31, 1999:
First Quarter. . . . . . . . . . $0.875 $3.875
Second Quarter . . . . . . . . . 0.500 2.000
Third Quarter. . . . . . . . . . 1.313 2.500
Fourth Quarter . . . . . . . . . 1.313 2.531
</TABLE>
On September 30, 1999, the closing bid price of the common stock as
reported on the Nasdaq SmallCap Market was $3.94 per share. On September 30,
1999, the Company had 12,720,497 shares of common stock outstanding and
approximately 324 holders of record of the common stock.
The Company has not paid and does not intend to pay any common stock
dividends to stockholders in the foreseeable future and intends to retain any
future earnings for capital expenditures and otherwise to fund the Company's
operations.
RECENT SALES OF UNREGISTERED SECURITIES
- -------------------------------------------
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration date of July 29,2003 and July 30, 2003 for an amount of
$600,000 and full cancellation of notes payable of $200,000.
In connection with the stock issuance on July 29, 1999 and July 30, 1999,
the Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with a exercise price of $3.00 per warrant
and an expiration date of July 30, 2003 representing the fees associated with
the transactions.
15
<PAGE>
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
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.
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
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 124,686 shares were unissued
as of September 30, 1999, 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.
In April 1999, the Company issued 5,000 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at $8,750.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the years in
the five-year period ended July 31, 1999 have been derived from the Consolidated
Financial Statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and related notes included elsewhere herein. All information is in
thousands, except per share data.
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $14,787 $26,271 $29,699(1) $30,801(1) $35,338(1)
Income (loss) from continuing operations (2,047) (724) (2,886) (2,072) 1,125
Net income (loss) (2,047) (724) (2,923) (3,744) 545
Net income (loss) per common share (.47) (.14) (.48) (.43) .05
Total assets 6,159 5,190 5,496 6,698 8,909
Long-term obligations 95 1,060 1,113 60 259
<FN>
- ---------------------
(1) The operations of PennWilson for the period from February 12, 1997 (date
of incorporation) through May 25, 1999, the date operations were discontinued,
are presented in the Consolidated Financial Statements as discontinued
operations.
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1999) refer to the Company's fiscal year ended July 31. The
results of operations related to the Company's CNG segment, primarily consisting
of PennWilson, which began operations in March 1997 and was discontinued during
fiscal 1999, have been presented separately in the Consolidated Financial
Statements of the Company as discontinued operations.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, from 1997 to March 1999, the provision of equipment and
services to the CNG industry. Beginning in 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
1999, the Company derived approximately 99% of its revenues from sales of LPG.
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 cost 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.
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price for fiscal 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
------------------------------
1997 1998 1999
----- ----- ------
Volume Sold
<S> <C> <C> <C>
LPG (millions of gallons) 61.7 88.5 117.0
Average sales price
LPG (per gallon) $0.48 $0.35 $ 0.30
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1999 COMPARED WITH JULY 31, 1998
Revenues. Revenues for fiscal 1999 were $35.4 million compared with $30.8
million for fiscal 1998, an increase of $4.5 million or 14.7%. Of this increase
$8.6 million was attributable to increased volume of LPG sold in fiscal 1999
partially offset by a decrease in average sales price of LPG sold in fiscal 1999
resulting in a decrease in sales of $3.9 million.
Cost of sales. Cost of sales for fiscal 1999 was $32.0 million compared
with $28.9 million for fiscal 1998, an increase of $3.2 million or 10.9%. Of
this increase $7.3 million was attributable to an increased volume of LPG
purchased in fiscal 1999 partially offset by the reduction in average sales
price of LPG purchased in fiscal 1999 resulting in a decrease in cost of goods
sold of $4.1 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.1 million in fiscal 1999 compared with $3.5
million in fiscal 1998, a decrease of $1.5 million or 41.4%. This decrease was
primarily attributable to (i) $970,364 of legal and professional fees and (ii)
$481,361 of costs associated with the issuance of warrants and registration
costs.
Other income and expense, net. Other income (expense), net was ($95,015)
in fiscal 1999 compared with $(448,641) in fiscal 1998. The decrease in other
expense, net was due primarily to the award from litigation of $987,114,
partially offset by costs associated from the settlement of litigation of
($577,691).
Income tax. Due to the availability of net operating loss carryforwards
($8.0 million and $8.8 million at July 31, 1999 and 1998), there was no income
tax expense in either year. The ability to use such net operating loss
carryforwards, which expire in the years 2009 to 2018, may be significantly
limited by the application of the "change in ownership" rules under Section 382
of the Internal Revenue Code.
YEAR ENDED JULY 31, 1998 COMPARED WITH JULY 31, 1997
Revenues. Revenues for fiscal 1998 were $30.8 million compared with $29.7
million for fiscal 1997, an increase of $1.1 million or 3.7%. This increase was
attributable to increased volume of LPG sold in fiscal 1998 of $9.3 million,
partially offset by a decrease in average sales price for LPG in fiscal 1998
resulting in a decrease in sales of $8.4 million. The increase in volume of LPG
sales in fiscal 1998 was partially due to the lack of sales to PMI during the
first two months of fiscal 1997 due to the expiration of the Company's Sales
Agreement with PMI on July 31, 1996. Sales of LPG to PMI totaled $3.7 million
(8.8 million gallons) for the first two months of fiscal 1998.
Cost of sales. Cost of sales for fiscal 1998 was $28.9 million compared
with $29.2 million for fiscal 1997, a decrease of $284,969 or 1%. This decrease
was attributable to a decrease in average purchase price for LPG purchased in
fiscal 1998 of $8.4 million, offset by the increase in volume of LPG sold in
fiscal 1998, resulting in an increase in cost of goods sold of $8.1 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.5 million in fiscal 1998 compared with $3.3
million in fiscal 1997, an increase of $285,030 or 8.8%. This increase was
primarily attributable to litigation and other legal matters ($250,570), payroll
related costs ($274,046), registration costs ($150,000), costs for warrants
issued ($160,000), and other expenses ($288,013) partially offset by reductions
of $838,000 of compensation associated with the issuance of warrants to an
employee and a consultant in fiscal 1997.
Other income and expenses, net. Other income (expense), net was ($448,641)
in fiscal 1998 compared with ($160,562) in fiscal 1997. The increase was
primarily due to interest costs associated with the credit facility obtained by
the Company in October 1997.
Income tax. Due to the net losses for fiscal 1998 and fiscal 1997, there
was no income tax expense in either year.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, and until the year ended July 31, 1999, has used cash in operations and
has had a deficit in working capital. In addition, the Company is involved in
litigation, the outcome of which cannot be determined at the present time. The
Company depends heavily on sales to one major customer. 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 fiscal
1997, 1998 and 1999. All information is in thousands.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1997 1998 1999
-------- -------- ------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $(1,847) $(1,065) $ 562
Net cash used in investing activities . . . . . . . (514) (1,337) (383)
Net cash provided by financing activities . . . . . 2,027 2,528 696
-------- -------- ------
Net increase (decrease) in cash . . . . . . . . . . $ (334) $ 126 $ 875
======== ======== ======
</TABLE>
PMI Sales Agreement. 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 June 1999, the PMI Sales Agreement was amended (the
"PMI Sales Agreement Amendment") to extend the expiration date until March 31,
2000 and to provide the Company with additional margins for any volume exceeding
7.0 million gallons per month during the summer period (April - September) and
9.0 million gallons per month during the winter period (October - March). Under
the PMI Sales Agreement Amendment, PMI is obligated to purchase a minimum volume
of 45.0 million gallons during October 1999 through March 2000.
LPG Supply Agreement. 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.
Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered into a ten year LPG supply contract (the "Exxon Supply Contract"),
whereby Exxon has agreed to supply and the Company has agreed to take, the
supply of propane and butane available at Exxon's King Ranch Gas Plant (the
"Plant") which is estimated to be between 10.1 million gallons per month and
13.9 million gallons per month blended in accordance with the specifications
outlined under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of 10.1 million gallons per month guaranteed by Exxon to be provided to the
Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7.7 million gallons into the CCPL
during the first quarter from the date that the CCPL is operational,
approximately 92 million gallons the following year and 122 million gallons each
year thereafter and continuing for four years.
20
<PAGE>
The Exxon Supply Contract currently requires that the Company purchase a
minimum supply of LPG, which is significantly higher than committed sales
volumes under the PMI Sales Agreement. In addition, the Company is required to
pay additional fees associated with the Additional Propane Supply, which will
increase its LPG costs by a minimum of $.01 per gallon without considering the
actual cost of the Additional Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons (the "PG&E Supply") of propane. In addition, PG&E is in
the process of obtaining up to 3.8 million gallons per month of additional
propane commitments, which if successful by December 31, 1999, would be an
adjustment to the PG&E Supply. Under the PG&E Supply Agreement, the Company is
not obligated to purchase the PG&E Supply until the CCPL is operational,
anticipated to be during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to the CCPL, as described above, and blended to the proper
specifications as outlined under the PMI Sales Agreement. In addition, by
utilizing the PG&E Supply, the Company would satisfy the CCPL Supply
requirements under the Exxon Supply Contract.
In connection with the Plant Commitment and the PG&E Supply, the Company
anticipates lower gross margins on its sales of LPG under the PMI Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous agreements to purchase LPG. The Company may incur significant
additional costs associated with storage, disposal and/or changes in LPG prices
resulting from the excess of the Plant Commitment and PG&E supply over actual
sales volumes.
The Company believes that the terms of the Exxon Supply Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the increase in the costs for LPG over previous agreements will be
offset by increased sales margins on LPG sold to the Company's customers. The
Company further believes that any additional costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms as favorable as the PMI Sales Agreement. In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur significant losses as a result of not being able to meet
its minimum purchase requirements under the Exxon Supply Contract and the PG&E
Supply Contract and/or the costs of LPG may be in excess of prices received on
sales of LPG.
Furthermore, until the US-Mexico Pipeline and Mexican Terminal Facilities
and Saltillo Terminal Facilities are completed, the Company will be required to
deliver the minimum monthly volumes from its Brownsville Terminal Facility.
Historically, sales of LPG from the Brownsville Terminal Facilities have not
exceeded 11.1 million gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.
Under the terms of the Exxon Supply Contract and the PG&E Supply Contract,
the Company must provide letters of credit in amounts equal to the cost of the
product purchased. The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are significantly higher than historical
amounts. In addition, the cost of the product purchased is tied directly to
overall market conditions. As a result, the Company's existing letter of credit
facility may not be adequate and the Company may require additional sources of
financing to meet the letter of credit requirements under the Exxon Supply
Contract and the PG&E Supply Agreement. Furthermore upon the implementation of
Deregulation the Company anticipates entering into contracts with Mexican
customers which require payments in pesos. In addition the Mexican customers
may be limited in their ability to provide adequate financing.
As a result of the Exxon Supply Contract and the PG&E Supply Contract, the
Company believes that its has an adequate supply of LPG to satisfy the
requirements of PMI under the PMI Sales Agreement and to meet its future sales
obligations, if any, upon the expiration of the PMI Sales Agreement. Due to
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to achieve higher margins on the sale of
LPG in the future.
21
<PAGE>
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. Beginning in October 1999, the
Company's gross margins on its LPG sales were reduced by 10% - 40% as a result
of increased LPG costs compared with the previous agreements.
Pipeline Lease. The Pipeline Lease currently expires on December 31,
2013, pursuant to an amendment (the "Pipeline Lease Amendment") entered into
between the Company and Seadrift on May 21, 1997, which became effective on
January 1, 1999 (the "Effective Date"). The Pipeline Lease Amendment provides,
among other things, for additional storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from the 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, less certain adjustments during the first two years from the Effective
Date and the Company is required to pay for a minimum volume of storage of
$300,000 per year beginning the second year from the Effective Date. In
addition, the Pipeline Lease Amendment provides for variable rental increases
based on monthly volumes purchased and flowing into the Pipeline and storage
utilized. The Company believes that the Pipeline Lease Amendment provides the
Company increased flexibility in negotiating sales and supply agreements with
its customers and suppliers. The Company has made all payments required under
the Pipeline Lease Amendment.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1999, the Company sold 117.0 million gallons of LPG which flowed
through the Pipeline. The Company can increase the Pipeline's capacity through
the installation of additional pumping equipment. (See "LPG Expansion
Program" below.)
LPG EXPANSION PROGRAM. On July 26, 1999, the Company was granted a permit
by the United States Department of State authorizing the Company to construct,
maintain and operate two pipelines (the "US Pipeline") crossing the
international boundary line between the United States and Mexico (from the
Brownsville Terminal Facilities near the Port of Brownsville, Texas and El
Sabino, Mexico) for the transport of LPG and refined products (motor gasoline
and diesel fuel) [the "Refined Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V.
("PennMex"), an affiliated company, received a permit from the Comision
Reguladora de Energia (the "Mexican Energy commission") to build and operate one
pipeline to transport LPG (the "Mexican Pipeline") [collectively, the US
Pipeline and the Mexican Pipeline are referred to as the "US-Mexico Pipeline"]
between El Sabino (at the point North of the Rio Bravo) and to a terminal
facility in the City of Matamoros, State of Tamaulipas, Mexico (the "Mexican
Terminal Facilities").
As a result of the above, the Company will be able to transport LPG
directly from the US into Mexico through the US-Mexico Pipeline and to the
Mexican Terminal Facilities (the "Expansion"). Management believes that as a
result of the Expansion, the Company will have additional strengths due to its
ability to penetrate further into Mexico, provide greater volumes of LPG as a
result of reduced cross border trucking delays and greater access to Mexican
distribution resources and the potential to achieve greater margins on its LPG
sales.
In addition to the Expansion, Tergas has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") for an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and
the Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG. As a result of the
Saltillo Terminal Facilities, the Company believes that it will be able to
further penetrate the Mexican market for the sale of LPG. Initially, the
Company believes that the Saltillo Terminal Facilities, when complete, will
generate additional sales of 5.0 million gallons monthly, independent of the
Expansion.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas") an affiliated Company, was
formed for the purpose of operating LPG terminal facilities in Mexico, including
the Mexican Terminal Facilities and the planned Saltillo Terminal Facilities.
The Company anticipates Tergas will be issued the permit to operate the Mexican
Terminal Facilities.
In connection with the Expansion and the Saltillo Terminal Facilities, the
Company is also in the process of completing upgrades at the Brownsville
Terminal facility (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements"). Among
other things, the Terminal Upgrades will include the installation of additional
piping to connect the Pipeline to the loading dock at the railroad spur located
at the Brownsville Terminal Facility and construction of railcar loading
facilities to enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities. The Company
expects the Terminal Upgrades to be completed by December 1999 at a total cost
of approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo Terminal Facilities, the Company will be able to distribute LPG to
Mexico by railcars, which will directly link the Company's Brownsville Terminal
Facility and the Saltillo Terminal Facilities.
22
<PAGE>
The Pipeline Enhancements will include the installation of additional
piping, meters, valves, analyzers and pumps along the Pipeline to increase the
capacity of the Pipeline make the Pipeline bi-directional. The Pipeline
Enhancements will increase the capacity of the Pipeline to 360 million gallons
per year, and will provide the Company with access to a greater number of LPG
suppliers and additional storage facilities. The Company expects to begin the
Pipeline Enhancements in January 2000 and to be completed three months
thereafter at a cost of approximately $1.5 million.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct the US-Mexico
Pipeline (including an additional pipeline to accommodate Refined Products) and
the Mexican Terminal Facilities and lease these assets to the Company. Under
the terms of the Lease Agreements, the Company will pay monthly rentals of
approximately $157,000, beginning the date that the US-Mexico Pipeline and
Mexican Terminal Facilities are physically capable to transport and receive LPG
in accordance with technical specifications required (the "Substantial
Completion Date"). In addition the Company has agreed to provide a lien on
certain assets, leases and contracts which are currently pledged to RZB, and
provide CPSC with a letter of credit of approximately $1.0 million. The Company
is currently in negotiations with RZB and CPSC concerning RZB's subordination of
RZB's lien on certain assets, leases and contracts. The Company also has the
option to purchase the US-Mexico Pipeline and Mexican Terminal Facilities at the
end of the 10th year anniversary and 15th year anniversary for $5.0 million and
$100,000, respectively. Under the terms of the Lease Agreements, CPSC is
required to pay all costs associated with the construction and maintenance of
the US - Mexico Pipeline and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC
agreed to accept 500,000 shares of common stock of the Company owned by the
President of the Company (the "Collateral") in place of the letter of credit
originally required under the Lease Agreements. The Collateral shall be
replaced by a letter of credit or cash collateral over a ten month period
beginning monthly after the Substantial Completion Date. In addition, the
Company has agreed to guaranty the value of the Collateral based on the fair
market value of the Collateral for up to $1.0 million.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date.
On September 16, 1999, the Company and CPSC entered into a purchase and
option agreement whereby the Company will purchase a 30% interest (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for $3.0 million. In connection with the Purchased Interests, the Company will
not assume any costs associated with CPSC's obligations under the Lease
Agreements until the Substantial Completion Date is reached, and the Company
will receive a minimum of $54,000 per month from the Company's payments under
the Lease Agreements (approximately 34% of the Company's monthly lease
obligations under the Lease Agreements). The Company is required to pay for
the Purchased Interests on January 3, 2000, or 10 days subsequent to the
Substantial Completion Date, whichever is later (the "Closing Date"). To secure
the payment of the $3.0 million for the Purchased Interests, the Company has
agreed to assign its interest in the net cash proceeds to be received from the
IBC-Brownsville award judgment (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings"). In the event that the net cash received from
the Judgment is less than $3.0 million, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2.0 million and $7.0 million, respectively, within 90 days from the Closing
Date. In the event the Company exercises the additional 20% option, then the
Purchase Interests will total 50% and the Company will receive a minimum from
the Purchased Interests of $90,000 per month from the Company's payments under
the Lease Agreements (approximately 57% of the Company's monthly lease
obligations under the Lease Agreements). The Company paid $50,000 to obtain the
Options.
The actual costs to complete the US-Mexico Pipeline and Mexican Terminal
Facilities are the sole responsibility of CPSC (the "Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
Foreign Ownership of LPG Operations. Both PennMex and Tergas are Mexican
companies, which are owned 90% and 95%, respectively, by Jorge R. Bracamontes,
an officer and director of the Company ("Bracamontes") and the balance by other
Mexican citizens ("Minority Shareholders"). Under current Mexican law (see
"Deregulation of the LPG Market in Mexico" below), foreign ownership of Mexican
entities involved in the distribution of LPG and the operation of LPG terminal
23
<PAGE>
facilities are prohibited. However, foreign ownership is permitted in the
transportation and storage of LPG. In October 1999, the Company received a
verbal opinion from the Foreign Investment Section of the Department of Commerce
and Industrial Development ("SECOFI"), that the Company's planned strategy of
selling LPG to PMI at the US border and then transporting the LPG through the
Mexican portion of the US - Mexico Pipeline to the Mexican Terminal Facilities
would comply with the LPG regulations. The Company intends to request a ruling
(the "Ruling") from SECOFI confirming the verbal opinion. There is no certainty
that the Company will obtain the Ruling, and if obtained, that the Ruling will
not be affected by future changes in Mexican laws.
The Company, Bracamontes and the Minority Shareholders have entered into
agreements whereby the Company may acquire up to 75% of the outstanding shares
of PennMex for a nominal amount, subject to among other things, receipt of the
Ruling. The Company intends to contract with Tergas for services to be performed
by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entitles comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
Deregulation of the LPG Market in Mexico. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petroleo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Organica del
Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petroleos
Mexicanos and Subsidiary Entities (the "Organic Law")). Under Mexican law and
related regulations, PEMEX is entrusted with the central planning and the
strategic management of Mexico's petroleum industry, including importation,
sales and transportation of LPG. In carrying out this role, PEMEX controls
pricing and distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in LPG activities related to transportation and storage. Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Accordingly, the Company expects to sell LPG directly to
independent Mexican distributors as well as PMI. Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG prior to
entering into contracts with the Company.
Pursuant to the PMI Sales Agreement upon Deregulation by the Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales Agreement. Depending on the outcome of any such renegotiation, the
Company expects to either (i) enter into contracts directly with independent
Mexican LPG distributors located in the northeast region of Mexico, or (ii)
modify the terms of the PMI Sales Agreement to account for the effects of
Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal
Facility. Upon the completion of the US - Mexico Pipeline and Mexican Terminal
Facilities, the Company will sell LPG to PMI at the U.S. border and transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as PMI.
Credit Arrangements. As of October 21, 1999, the Company has a $10.0
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) 2.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed to between the Company and RZB. Any
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
24
<PAGE>
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.
In connection with the Company's purchases of LPG from Exxon and/or PG&E
NGL Marketing, LP (PG&E), the Company issues letters of credit on a monthly
basis based on anticipated purchases.
As of July 31, 1999, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG totaled $6.0 million of which
$2.9 million was being used to secure unpaid purchases from Exxon. In
connection with these purchases, the Company had unpaid invoices due from PMI
totaling $2.5 million and cash balances maintained in the RZB Credit Facility
collateral account of $847,042 as of July 31, 1999.
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 $2.3 million, 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 March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
During July 1999, the Company paid the remaining $600,000 of promissory
notes outstanding through a cash payment of $300,000 and the issuance of 166,667
shares of common stock of the Company as payment for and full cancellation of
$300,000 of promissory notes.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 125,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 13, 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 were 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. In connection therewith, the Company has no
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.
25
<PAGE>
During December 1998, the Company issued 15,000 shares of common stock of
the Company and warrants to purchase 10,000 shares of common stock with an
exercise price of $3.25 per warrant and an expiration date of December
31, 2000 in exchange for cancellation of all outstanding obligations totaling
$22,500 and other obligations as outlined in an agreement between the parties.
On March 18, 1999, the Company issued 120,000 shares of common stock of the
Company and warrants to purchase 60,000 shares of common stock with an exercise
price of $2.25 per warrant and an expiration date of March 18, 2002 for an
amount of $150,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 60,606 shares of common stock of the
Company and warrants to purchase 30,303 shares of common stock with an exercise
price of $2.59 per warrant and an expiration date of March 19, 2002 for an
amount of $100,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 146,667 shares of common stock of the
Company and warrants to purchase 73,333 shares of common stock with an exercise
price of $2.42 per warrant and an expiration date of March 19, 2002 for an
amount of $220,000. Net proceeds from the sale were used for working capital
purposes.
In connection with the stock issuances in March 1999, the Company issued a
total of 35,000 shares of common stock of the Company, representing the fees
associated with the transactions.
Pursuant to the 1997 Stock Award Plan, in April 1999, the Company issued
5,000 shares of Common Stock to a consultant in payment for services rendered to
the Company valued at $8,750.
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000. Net proceeds from the sale were used for working capital purposes.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000. Net proceeds from the sale were used for working capital purposes.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000. Net proceeds from the sale were used for working capital purposes.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration date of July 29,2003 and July 30, 2003 for an amount of
$600,000 and full cancellation of notes payable of $200,000. Net proceeds from
the sale were used for working capital purposes and to pay down $300,000 of debt
obligations.
In connection with the stock issuance on July 29, 1999 and July 30, 1999,
the Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with a exercise price of $3.00 per warrant
and an expiration date of July 30, 2003 representing the fees associated with
the transactions.
As of July 31, 1999, $769,701 is owed by the Company in connection with
various settlement agreements with legal firms and suppliers (the "Creditors")
in connection with prior services performed for the Company. Under the terms
of the settlements, the Company has agreed to make specified monthly payments.
In connection with the settlements, the Company has agreed in the future to
provide a "Stipulation of Judgment" to the Creditors in the event that the
Company defaults under the settlement agreements.
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect to exercise the warrants within the call provision.
26
<PAGE>
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the
exercise of warrants (the "Registrable Securities"). The obligations of the
Company with respect to the Registrable Securities include one-time demand
registration rights and/or piggy-back registration rights (the "Registration").
The Company is required to file an effective registration by either September
19, 1999, December 1, 1999 or January 31, 2000. In connection with the
Registration of the Registrable Securities, the Company is required to provide
notice to the holder of the Registrable Securities, who may or may not elect to
be included in the Registration. The Company is obligated to register the
Registrable Securities even though the Registrable Securities may be tradable
under Rule 144. The Company did not file a registration statement for the shares
agreed to be registered by September 19, 1999. The Company has also received
notice of a demand for registration for certain of the Shares. The Registration
Rights Agreements do not contain provisions for damages, if the Registration is
not completed except for those Shares required to be registered on December 1,
1999, whereby for each month after December 1999 and if the Company fails to
have an effective registration statement, the Company will be required to pay a
penalty of $80,000 to be paid in cash and/or common stock of the Company based
on the then current trading price of the common stock of the Company.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville. On
August 26, 1999, IBC-Brownsville was denied a rehearing of an earlier decision
on June 10, 1999 in which the Supreme Count of Texas denied IBC's-Brownsville
petition for review. As of July 31, 1999, the net amount of the award is
approximately $3.9 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, less attorneys' fees.
Although no assurance can be made that IBC-Brownsville will not continue to seek
other legal remedies against the Judgment, management believes that the Company
will ultimately prevail, and will receive the proceeds from such Judgment. In
addition, a former officer of the Company is entitled to 5% of the net proceeds
(after expenses and legal fees).
Settlement of Litigation. On March 16, 1999, the Company settled in
mediation a lawsuit with its former chairman of the board, Jorge V. Duran. In
connection therewith and without admitting or denying liability the Company
agreed to pay Mr. Duran approximately $456,000 in cash and common stock of the
Company of which $100,000 is to be paid by the Company's insurance carrier. The
Company has agreed to register the stock in the future.
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
and expansion program, which includes the acquisition of the interests in
PennMex and the consummation of an operating agreement with Tergas.
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, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital. See note Q to the
Consolidated Financial Statements.
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8.0 million. 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.
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.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
-------------------------------------------------------
To the Board of Directors
Penn Octane Corporation
We have audited the accompanying consolidated balance sheets of Penn Octane
Corporation and its subsidiaries (Company) as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of July 31, 1998 and 1999, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended July 31, 1999 in conformity with generally accepted accounting
principles.
We have also audited Schedule II of the Company for each of the three years in
the period ended July 31, 1999. In our opinion, this schedule presents fairly
in all material respects, the information required to be set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note Q, conditions
exist which raise substantial doubt about the Company's ability to continue as a
going concern including 1) the Company has not sustained profitable operations,
2) outstanding litigation, 3) a deficit in working capital, and 4) consummation
of agreements related to the LPG expansion program referred to in note O.
Management's plans in regard to these matters are described in note O. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in note B, the Company adopted the provisions of SFAS 128,
"Earnings per Share", during the year ended July 31, 1998.
/S/ BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
October 8, 1999
29
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31
ASSETS
1998 1999
---------- ----------
<S> <C> <C>
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,513 $1,032,265
Trade accounts receivable, less allowance for doubtful accounts of . . 1,195,653 2,505,915
$418,796 and $521,067 (note D)
Notes receivable (note E). . . . . . . . . . . . . . . . . . . . . . . - 77,605
Inventories (notes B1 and H) . . . . . . . . . . . . . . . . . . . . . 377,097 615,156
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 90,851 42,517
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,821,114 4,273,458
Property, plant and equipment - net (notes B2 and G). . . . . . . . . . 2,908,251 3,171,650
Lease rights (net of accumulated amortization of $478,560 and $524,355) 675,479 629,684
(note B2)
CNG assets held for sale (notes D and E). . . . . . . . . . . . . . . . 1,293,136 -
Notes receivable (note E) . . . . . . . . . . . . . . . . . . . . . . . - 822,196
Other non-current assets. . . . . . . . . . . . . . . . . . . . . . . . - 11,720
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,697,980 $8,908,708
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1999
--------------- ---------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note K) . . . . . . . . . . . . . . . $ 1,693,897 $ 365,859
Revolving line of credit (note N) . . . . . . . . . . . . . . . . . . . . . 991,823 -
LPG trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 931,362 2,850,197
Other accounts payable and accrued liabilities . . . . . . . . . . . . 2,674,474 1,382,603
Borrowings from IBC-Brownsville (notes I and S). . . . . . . . . . . . . . 672,552 -
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 6,964,108 4,598,659
Long-term debt, less current maturities (note K) . . . . . . . . . . . . . . 60,000 258,617
Commitments and contingencies (notes D, K and N) . . . . . . . . . . . . . . - -
Stockholders' Equity (note L)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; . . - -
No shares issued and outstanding at July 31, 1998 and 1999
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,. . - 900
5,000,000 shares authorized; 0 and 90,000 shares issued and outstanding at
July 31, 1998 and 1999
Common stock-$.01 par value, 25,000,000 shares authorized;. . . . . . . . . 99,527 118,456
9,952,673 and 11,845,497 shares issued and outstanding at July 31,
1998 and 1999
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 13,318,592 17,133,222
Notes receivable from the president of the Company and a related party. . . ( 2,763,006) ( 2,765,350)
for exercise of warrants, less reserve of $223,000 and $451,141 at July 31,
1998 and 1999, respectively
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,981,241) ( 10,435,796)
--------------- ---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . (326,128) 4,051,432
--------------- ---------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . $ 6,697,980 $ 8,908,708
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1997 1998 1999
-------------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,699,403 $ 30,801,355 $ 35,337,935
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 29,172,138 28,887,169 32,044,194
-------------------- ---------------- ----------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 527,265 1,914,186 3,293,741
Selling, general and administrative expenses
Legal and professional fees . . . . . . . . . . . . . . . 1,070,351 1,320,922 350,558
Salaries and payroll related expenses . . . . . . . . . . 614,551 888,597 904,076
Stock based compensation (note M) . . . . . . . . . . . . 837,600 - -
Travel. . . . . . . . . . . . . . . . . . . . . . . . . . 218,926 178,747 151,362
Other (note P). . . . . . . . . . . . . . . . . . . . . . 511,342 1,149,534 668,173
-------------------- ---------------- ----------------
3,252,770 3,537,800 2,074,169
-------------------- ---------------- ----------------
Operating income (loss) . . . . . . . . . . . . . . . . . ( 2,725,505) ( 1,623,614) 1,219,572
Other income (expense)
Interest expense. . . . . . . . . . . . . . . . . . . . . ( 236,236) ( 458,657) ( 521,418)
Interest income . . . . . . . . . . . . . . . . . . . . . 71,426 10,016 16,981
Other income. . . . . . . . . . . . . . . . . . . . . . . 4,248 - -
Settlement of litigation (note N) . . . . . . . . . - - ( 577,691)
Award from litigation (notes N and S) . . . . . . . . . . - - 987,114
-------------------- ---------------- ----------------
Income (loss) from continuing operations before taxes . ( 2,886,067) ( 2,072,255) 1,124,558
Provision for income taxes (notes B3 and J). . . . . . . . - - -
-------------------- ---------------- ----------------
Income (loss) from continuing operations. . . . . ( 2,886,067) ( 2,072,255) 1,124,558
Discontinued operations, net of taxes (notes B2, B8 and D)
Loss from operations of CNG segment . . . . . . ( 36,592) ( 1,671,801) ( 290,625)
Loss on disposal of CNG segment. . . . . . . . - - ( 288,488)
-------------------- ---------------- ----------------
Total loss from discontinued operations . . . . ( 36,592) ( 1,671,801) ( 579,113)
-------------------- ---------------- ----------------
Net income (loss) (notes B3 and J). . . . . . . . . . . $ ( 2,922,659) $ ( 3,744,056) $ 545,445
==================== ================ ================
Income (loss) from continuing operations . . . . . . . . . $ ( 0.47) $ ( 0.25) $ 0.11
==================== ================ ================
per common share (notes B4 and C)
Net income (loss) per common share (notes B4 and C). . . . $ ( 0.48) $ ( 0.43) $ 0.05
==================== ================ ================
Income (loss) from continuing operations per common share. $ ( 0.47) $ ( 0.25) $ 0.10
==================== ================ ================
assuming dilution (notes B4 and C)
Net income (loss) per common share assuming dilution . . . $ ( 0.48) $ ( 0.43) $ 0.05
==================== ================ ================
(notes B4 and C)
Weighted average common shares outstanding . . . . . . . . 6,144,724 9,235,299 10,659,100
==================== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31
1997 1998 1999
------------------ -------------------- ------------------
Shares Amount Shares Amount Shares Amount
--------- ------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Beginning balance 270,000 $ 2,700 270,000 $ 2,700 - -
Conversion of 270,000 shares of Preferred Stock
to 899,910 shares of Common Stock on January 30,
1998 - - (270,000) (2,700) - -
--------- ------- ---------- -------- --------- -------
Ending balance 270,000 $ 2,700 - $ - - $ -
========= ======= ========== ======== ========= =======
SENIOR PREFERRED STOCK
Beginning balance - - - - - -
Issuance of 90,000 shares of Senior Preferred
Stock during March 1999 in exchange for cancellation
of $900,000 of promissory notes - - - - 90,000 900
--------- ------- ---------- -------- --------- -------
Ending balance - - - $ - 90,000 $ 900
========= ======= ========== ======== ========= =======
COMMON STOCK
Beginning balance 5,205,000 $52,050 8,169,286 $81,693 9,952,673 $99,527
Issuance of common stock for service in January
1997 10,000 100 - - - -
Issuance of common stock in connection with
Exchange Agreements between the Company and
certain warrant holders to purchase shares of common
stock in the Company 164,286 1,643 - - - -
Issuance of common stock upon exercise of
warrants on April 1, 1997, in connection with
retirement of $250,000 debt obligations 250,000 2,500 - - - -
Issuance of common stock upon exercise of
warrants in April 1997, in exchange for settlement of
46,759 of outstanding contractor payables 25,000 250 - - - -
Issuance of common stock upon exercise of
warrants during April 1997, in exchange for promissory
note 2,200,000 22,000 - - - -
Issuance of common stock upon exercise of
warrants during March 1997, in exchange for
promissory note 15,000 150 - - - -
Issuance of common stock upon exercise of
warrants during April 1997 300,000 3,000 - - - -
Issuance of common stock upon exercise of
warrants during August 1997, in connection with
retirement of $75,000 debt obligation - - 75,000 750 - -
Issuance of common stock upon exercise of
warrants during August 1997 - - 430,000 4,300 - -
Issuance of common stock in September 1997 in
exchange for settlement of $113,000 of outstanding
consulting fees - - 20,314 203 - -
Conversion of 270,000 shares of preferred stock
to 899,910 shares of common stock on January
30, 1998 - - 899,910 8,999 - -
Dividend of 100,000 shares of common stock
paid upon conversion of 270,000 shares of
preferred stock to 899,910 shares of common
stock on January 30, 1998 - - 100,000 1,000 - -
Issuance of common stock in April 1998 in
connection with retirement of $1,032,652 debt
obligations - - 258,163 2,582 - -
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1997 1998 1999
----------------- ------------------ --------------------
Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- ---------- --------
COMMON STOCK - CONTINUED
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock in November 1998 - - - - 250,000 2,500
Issuance of common stock in December 1998 in
exchange for settlement of $22,500 of
outstanding obligations - - - - 15,000 150
Issuance of common stock in December 1998 in
exchange for settlement of $118,607 of debt
obligations - - - - 53,884 539
Sale of common stock in December 1998 - - - - 500,000 5,000
Sale of common stock in March 1999, including
related fees of 35,000 shares of common stock - - - - 362,273 3,623
Issuance of common stock in connection with
conversion of debt into Senior Preferred Stock of
the Company - - - - 50,000 500
Issuance of common stock in exchange for
consulting services - - - - 5,000 50
Sale of common stock in July 1999 - - - - 490,000 4,900
Issuance of common stock in July 1999 in
exchange for cancellation of $300,000 of debt
obligations - - - - 166,667 1,667
--------- ------- --------- ------- ---------- --------
Ending balance 8,169,286 $81,693 9,952,673 $99,527 11,845,497 $118,456
========= ======= ========= ======= ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1997 1998 1999
------------ -------------- -------------
Amount Amount Amount
------------ -------------- -------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL
Beginning balance $ 5,954,565 $ 10,515,266 $ 13,318,592
Sale of common stock - - 2,288,477
Issuance of common stock for notes,
cancellation of commission agreements,
services and payment on promissory note 13,200 1,142,867 140,418
Conversion of preferred stock to common
stock - (6,299) -
Exchange of debt for senior preferred
stock and common stock - - 997,933
Dividends on preferred stock - 224,000 -
Amortization of loan discount - 75,000 172,802
Grant of stock for services - - 8,700
Common stock to be distributed in
connection with the settlement of a lawsuit - - 206,300
Grant of warrants for services 917,785 - -
Grant of warrants in connection with
registration rights agreement - 160,542 -
Exercise of warrants in connection with
retirement of debt 494,009 136,516 -
Exercise of warrants 3,135,707 1,070,700 -
------------ -------------- -------------
Ending balance $10,515,266 $ 13,318,592 $ 17,133,222
============ ============== =============
STOCKHOLDERS' NOTES
Beginning balance $ - $( 2,834,865) $ (2,763,006)
Notes receivable from the President and a
related party for exercise of warrants, less
reserve of $0, $223,000, and $451,141 (2,834,865) 71,859 (2,344)
------------ -------------- -------------
Ending balance $(2,834,865) $ (2,763,006) $ (2,765,350)
============ ============== =============
ACCUMULATED DEFICIT
Beginning balance $(4,089,526) $ (7,012,185) $(10,981,241)
Net income (loss) for the year (2,922,659) (3,744,056) 545,445
Dividends on preferred stock - (225,000) -
------------ -------------- -------------
Ending balance $(7,012,185) $ (10,981,241) $(10,435,796)
============ ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
1997 1998 1999
-------------- -------------------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $( 2,922,659) $ ( 3,744,056) $ 545,445
Adjustments to reconcile net (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 448,019 249,584 230,078
Amortization of lease rights 115,404 45,795 45,795
Non-employee stock based costs and other 108,969 30,000 -
Issuance of warrants in connection with
registration rights agreement - 160,542 -
Loan discount - 75,000 134,741
Award from litigation - - ( 987,114)
Stock based compensation cost 837,600 - -
Settlement of litigation - - 206,300
Asset impairment loss - 400,000 -
Loss on sale of assets - 2,579 288,488
Other - 71,859 3,256
Changes in current assets and liabilities:
Trade accounts receivable ( 252,037) ( 914,071) ( 1,310,262)
Related party receivable ( 171,601) 171,519 -
Interest receivable 26,233 - -
Costs and estimated earnings in excess of billings
on uncompleted contracts ( 196,888) 196,888 -
Inventories ( 74,746) 129,069 ( 238,059)
Prepaid and other current assets ( 35,272) ( 42,693) 48,334
LPG trade accounts payable - 931,362 1,918,835
Billings in excess of costs and estimated earnings
on uncompleted contracts 7,596 ( 7,596) -
Other assets and liabilities, net - ( 47,091) ( 11,270)
Other accounts payable and accrued liabilities 262,634 1,226,445 ( 312,754)
-------------- -------------------- ---------------------
Net cash provided by (used in) operating activities ( 1,846,748) ( 1,064,865) 561,813
Cash flows from investing activities:
Acquisition of inventory and fixed assets from WTI ( 394,000) - -
Capital expenditures ( 120,017) ( 1,358,686) ( 432,988)
Sale of assets - 21,843 -
Payments on note receivable - - 49,548
-------------- -------------------- ---------------------
Net cash used in investing activities ( 514,017) ( 1,336,843) ( 383,440)
Cash flows from financing activities:
Revolving credit facilities 140,000 851,823 ( 991,823)
Issuance of debt 1,502,033 1,500,000 -
Issuance of common stock 516,073 1,131,250 2,105,500
Reduction in debt ( 130,724) ( 954,994) ( 417,298)
-------------- -------------------- ---------------------
Net cash provided by financing activities 2,027,382 2,528,079 696,379
-------------- -------------------- ---------------------
Net increase (decrease) in cash ( 333,383) 126,371 874,752
Cash at beginning of period 364,525 31,142 157,513
-------------- -------------------- ---------------------
Cash at end of period $ 31,142 $ 157,513 $ 1,032,265
============== ==================== =====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 165,964 $ 404,883 $ 338,659
============== ==================== =====================
Supplemental disclosures of noncash transactions:
Preferred stock, common stock and warrants issued
(notes L, M and N) $ 4,004,756 $ 1,740,242 $ 1,556,507
============== ==================== =====================
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company owns and operates a terminal
facility in Brownsville, Texas (Brownsville Terminal Facility). The Company has
a long-term lease agreement for approximately 132 miles of pipeline from certain
gas plants in Texas to the Brownsville Terminal Facility. The Company sells LPG
primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive importer of LPG
into Mexico. PMI is also a subsidiary of Petroleos Mexicanos, the state-owned
Mexican oil company (PEMEX). PMI distributes LPG in the northeastern region of
Mexico.
The Company commenced operations during the fiscal year ended July 31, 1995 upon
construction of the Brownsville Terminal Facility. Prior to such time, the
Company was in the "development stage" until the business was established.
Since the Company began operations, the primary customer for LPG has been PMI.
Sales of LPG to PMI accounted for 97%, 99% and 99% of the Company's total
revenues for the fiscal years ended July 31, 1997, 1998 and 1999, respectively.
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.
During May 1999, the Company sold certain CNG related assets to a corporation
controlled by a director and officer of the Company (see note E). As a result
of the sale, the Company is no longer in the CNG business and has reflected the
historical results of the CNG segment as discontinued operations. All prior
periods have been restated.
BY-LAWS
- -------
At the 1997 Annual Meeting of Stockholders of Penn Octane Corporation on May 29,
1997, the stockholders approved an amendment and restatement of Penn Octane
Corporation's by-laws to, among other things, allow the Board of Directors of
Penn Octane Corporation to amend the by-laws and to take certain other actions
and to effect certain other matters without the further approval of the
stockholders.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include the Company and its subsidiaries,
PennWilson and Holdings (Company). All significant intercompany accounts and
transactions are eliminated.
37
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. INVENTORIES
Inventories are stated at the lower of cost or market. For valuing propane and
butane gas, the Company changed costing methods from the weighted average method
to the first-in, first-out method for the year ended July 31, 1997. The Company
determined that the first-in, first-out method was preferable for matching costs
with revenues. The effect of this change in accounting method was immaterial to
the consolidated financial statements. For valuing CNG-related inventory, cost
was determined on the first-in, first-out basis.
2. PROPERTY, PLANT AND EQUIPMENT AND LEASE RIGHTS
Property, plant and equipment are recorded at cost. Assets are depreciated
and amortized using the straight-line method over their estimated useful lives
as follows:
LPG terminal, building and leasehold
improvements 19 years
Automobiles 3-5 years
Furniture, fixtures and equipment 3-5 years
Trailers 8 years
The lease rights are being amortized as follows:
Lease rights 19 years
Maintenance and repair costs are charged to expense as incurred, and renewals
and improvements that extend the useful life of the assets are added to the
property, plant and equipment accounts.
The provisions of Statement of Financial Accounting Standards No. 121 (SFAS
121) "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", require the Company to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment has occurred, the amount of
the impairment is charged to operations. No impairments were recognized for the
years ended July 31, 1997 and 1999. For the year ended July 31, 1998, the
Company recorded a $400,000 charge to operations for the impairment of
long-lived assets relating to the CNG business (see note D).
3. INCOME TAXES
The Company will file a consolidated income tax return for the year ended
July 31, 1999.
The Company accounts for deferred taxes in accordance with SFAS 109, "Accounting
for Income Taxes". Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are the allowance for doubtful
accounts receivable, amortization of professional fees and deferred compensation
expense.
38
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurred
losses, giving effect to common stock equivalents is not presented as it would
be antidilutive.
The Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per
Share", which supersedes Accounting Principles Board Opinion (APB) 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.
5. CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers cash in banks and
securities purchased with a maturity of three months or less to be cash
equivalents.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 "Disclosures about Fair Value of Financial Instruments", requires the
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate the
value. SFAS 107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts are not intended to
represent the underlying value of the Company. The carrying amounts of cash and
cash equivalents, current receivables and payables and long-term liabilities
approximate fair value because of the short-term nature of these instruments.
8. REVENUES AND COST RECOGNITION
Certain of the Company's work was performed under fixed-price contracts.
Revenues were recognized on the percentage-of-completion method, measured by the
percentage of total costs incurred to date to estimated total costs for each
contract. This method was used because management considered expended costs to
be the best available measure of progress on these contracts.
Contract costs included all direct materials and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repair costs. General and administrative costs were charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts were made in
the period in which such losses were determined.
39
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation", establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to acquire
goods and services from non-employees.
The Company has elected under the guidance provided by SFAS 123 to continue to
account for employee stock-based compensation using the intrinsic value method
prescribed in APB 25, "Accounting for Stock Issued to Employees" and related
Interpretations.
10. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform to
the current presentation.
NOTE C - INCOME (LOSS) PER COMMON SHARE
The following table presents reconciliations from income (loss) per common share
to income (loss) per common share assuming dilution (see notes L and M for the
convertible preferred stock and the warrants):
<TABLE>
<CAPTION>
For the year ended July 31, 1997
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ (2,886,067) - -
--------------
Loss from discontinued operations (36,592) - -
Net income (loss) (2,922,659) - -
--------------
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders (2,886,067) 6,144,724 $ (0.47)
===========
Loss from discontinued operations (36,592) 6,144,724 $ (0.01)
===========
Net income (loss) available to common stockholders (2,922,659) 6,144,724 $ (0.48)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders N/A N/A $ N/A
===========
Loss from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common
stockholders $ N/A N/A $ N/A
============== ============= ===========
</TABLE>
40
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
<TABLE>
<CAPTION>
For the year ended July 31, 1998
-------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ (2,072,255) - -
--------------
Loss from discontinued operations (1,671,801) - -
Net income (loss) (3,744,056) - -
--------------
Less: Dividends on preferred stock (225,000) - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders (2,297,255) 9,235,299 $ (0.25)
===========
Loss from discontinued operations (1,671,801) 9,235,299 $ (0.18)
===========
Net income (loss) available to common
stockholders (3,969,056) 9,235,299 $ (0.43)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders N/A N/A $ N/A
===========
Loss from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common
stockholders $ N/A N/A $ N/A
============== ============= ===========
</TABLE>
41
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
<TABLE>
<CAPTION>
For the year ended July 31, 1999
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 1,124,558 - -
--------------
Loss from discontinued operations (579,113) - -
Net income (loss) 545,445 - -
--------------
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders 1,124,558 10,659,100 $ 0.11
===========
Loss from discontinued operations (579,113) 10,659,100 $ (0.06)
===========
Net income (loss) available to common
stockholders 545,445 10,659,100 $ 0.05
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - 89,437 -
Convertible Preferred Stock - 185,440 -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders 1,124,558 10,933,977 $ 0.10
===========
Loss from discontinued operations (579,113) 10,933,977 $ (0.05)
===========
Net income (loss) available to common
stockholders $ 545,445 10,933,977 $ 0.05
============== ============= ===========
</TABLE>
NOTE D - DISCONTINUED OPERATIONS
ACQUISITION OF ASSETS FROM WILSON TECHNOLOGIES INCORPORATED
- -----------------------------------------------------------------
In connection with the Company's plans to enter the CNG fueling business, on
March 7, 1997, PennWilson and Wilson Technologies Incorporated (Wilson), a
leading supplier of CNG fueling stations engaged in the business of selling,
designing, constructing, installing and servicing CNG fueling stations and
related products for use in the CNG industry throughout the world, entered into
an Interim Operating Agreement (the Arrangement). Under the terms of the
Arrangement, effective as of February 17, 1997, PennWilson was granted the right
to use the Wilson name, technology and employees, subject to certain
restrictions, as well as rights to perform contracts which Wilson had not begun
to perform, in exchange for monthly payments of $84,000, and royalty payments
not to exceed $3,000,000 cumulatively, less certain adjustments, if any, based
on 5% of net revenues. The Arrangement provided that PennWilson was entitled to
all revenues earned by PennWilson and by certain businesses of Wilson commencing
as of February 17, 1997. In addition, Zimmerman Holdings Inc. (ZHI), the parent
of Wilson, agreed to reimburse the Company for 50% of the net operating cash
deficit of PennWilson, if any. In carrying out the business, PennWilson was also
entitled to use the Wilson premises as well as available inventory of Wilson at
cost plus 10% or any other amount mutually agreed upon by PennWilson and Wilson.
The Arrangement was to have terminated on the earlier of 90 days from the date
of the Arrangement or the closing of the Acquisition described below. If the
Acquisition was not completed within 90 days, the Arrangement could be extended
by PennWilson for up to three years.
42
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - DISCONTINUED OPERATIONS - Continued
Simultaneously with the Arrangement, the Company, PennWilson, Wilson and
ZHI entered into a purchase agreement (the Acquisition), whereby PennWilson
would acquire certain assets, including trademarks and licenses, and certain
ongoing businesses of Wilson, in exchange for the assumption of certain
liabilities, a $3,000,000 contingent royalty note, a promissory note based upon
certain operating expenses and a $220,000 convertible debenture issued by the
Company. The Acquisition was subject to several conditions, including obtaining
satisfactory restructuring of all of Wilson's obligations to creditors including
the consent of such creditors to the proposed Acquisition.
Effective as of March 21, 1997, the Arrangement was amended (the Amendment) so
that PennWilson agreed to acquire $394,000 of Wilson's inventory and/or other
assets to be paid for through the application of $294,000 previously paid under
the Arrangement, plus other adjustments. In addition, PennWilson issued a
promissory note in the amount of $100,000 to Wilson which is payable in equal
annual installments of $20,000 plus interest at the prime rate (8.5% at July 31,
1998) beginning June 5, 1998. To date the Company has not made the required June
5, 1998 installment. Furthermore, the cumulative royalty to be paid to Wilson
was reduced from $3,000,000 to $2,000,000, less certain adjustments. Also under
the Amendment, effective June 1, 1997, the Company ceased making the monthly
payment and assumed direct responsibility for expenses relating to the operation
of Wilson's facilities, including the lease of the premises and the hiring of
certain employees formerly employed by Wilson. Pursuant to the Amendment and
except as provided for therein, the Arrangement and Acquisition were terminated
effective as of March 21, 1997.
During December 1998, the Company issued 53,884 shares of common stock of the
Company to ZHI as payment for and full cancellation of the $100,000 note payable
and related interest and other obligations totaling $18,000. In connection
therewith, the Company no longer has any further obligation to pay any future
royalties in connection with the Arrangement and the Amendment.
The acquisition was accounted for as a purchase. Accordingly, the results of
operations of PennWilson were included in the consolidated financial statements
from the effective date of the acquisition.
Proforma operating results for the years ended July 31, 1996 and 1997, as if the
acquisition had been completed on August 1, 1995, were not available.
However, WTI's revenues for the period from August 1, 1995 to March 21, 1997
were not material.
RESULTS OF OPERATIONS
- -----------------------
During the year ended July 31, 1998, the Company recorded additional revenues of
$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 Environmental ("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 (see
note N). 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.
43
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - DISCONTINUED OPERATIONS - Continued
At July 31, 1998, the Company determined that CNG related assets constructed by
the Company and spare parts inventories (CNG assets held for sale) should be
written down to their net realizable value due to the uncertainty in the
Company's strategy regarding the CNG business. The amount of the charge to
operations was $400,000.
In connection with the sale of assets related to the CNG business during May
1999 (see note E), the Company has effectively disposed of its CNG segment and
has discontinued operations of that segment. In accordance with APB 30, the
results of operations related to the CNG segment have been recorded as
discontinued operations for all periods presented in the Company's financial
statements and the assets of the CNG segment to be sold have been presented
separately for all periods presented. As a result of the sale, the Company
recorded a loss associated with the discounted notes (see note E).
NOTE E - SALE OF CNG ASSETS
During May 1999, the Company sold its remaining CNG assets and business to a
company (Buyer) controlled by a director and officer of the Company. Under the
terms of the sale, the Company received promissory notes aggregating $1,200,000
to be paid over a period of 61 months. The notes are collateralized by the CNG
assets, the common stock of the Buyer owned by the director and officer and
warrants to purchase 200,000 shares of common stock of the Company which had
previously been issued to the director and officer by the Company. The director
and officer has personally guaranteed a portion of the balance of the notes.
The notes contain a provision for prepayment at a discount and bear interest at
rates specified therein. The Company discounted the notes for the prepayment
discount, resulting in a discount of 260,000 and a discounted balance of the
notes of $940,000 at the date of issuance, which the Company believes is less
than the fair value of the collateral. The effective interest rate of the
notes after giving affect to the discount is 8.6%. At July 31, 1999, the Buyer
has made all required payments provided for in the notes. Because the Buyer can
pay the notes at any time, the Company has determined that it will account for
interest income using the cost recovery method to account for collections on the
notes. Under this method, the amounts recorded as notes receivable will not
exceed the discounted cash payoff amounts.
The Stock Pledge and Security Agreement (Agreement) executed in connection with
the sale provides that the Buyer may sell the collateral at fair market value at
any time during the term of the notes without the Company's consent provided
that all proceeds collected from the sale will be applied to the note balances.
In addition, the Company has agreed to subordinate its secured interest in the
collateral after the Buyer has paid $300,000 plus interest at 10% as provided
for in the Agreement.
NOTE F - RELATED PARTIES
DIRECTORS, OFFICERS AND SHAREHOLDERS
- ---------------------------------------
In March 1996 and April 1996, the Company received loans from two shareholders
aggregating $1,000,000. The notes bear interest at 10% and had accrued interest
at July 31, 1996 and 1997 of $35,833 and $32,662, respectively. During the year
ended July 31, 1997, the Company paid interest totaling $98,794 and reduced the
principal balance outstanding by $100,000. During September and October 1997,
the Company repaid the amount owing on the loans.
During March 1997, the Company received advances from its President in the
amount of $85,000. This amount was repaid during April 1997.
44
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - RELATED PARTIES - Continued
During April 1997, the Company's President exercised warrants to purchase
2,200,000 shares of common stock of the Company at an exercise price of $1.25
per share. The consideration for the exercise of the warrants included $22,000
in cash and a $2,728,000 promissory note. The note accrues interest at the rate
of 8.25% per annum and is payable annually on April 11 until maturity on April
11, 2000. The payments due on April 11, 1998 and 1999 have not been received.
The promissory note is collateralized by 1,000,000 shares of common stock of the
Company owned by the President and has been recorded as a reduction of
stockholders' equity. In connection with the Company's lease agreements (the
Lease Agreements) with CPSC (see note O), the President agreed to provide
500,000 shares of his common stock of the Company as collateral. During
September 1999, in consideration for providing the collateral, the Board of
Directors of the Company agreed to offset the interest due on the President's
$2,728,000 promissory note.
At July 31, 1998, interest receivable from the President was offset by the
remaining amount due to the President as of July 31, 1998 under his employment
agreement. The remaining balance of the interest receivable at July 31, 1998 and
the interest for the year ended July 31, 1999 has been reserved.
During the year ended July 31, 1998 and 1999, the Company paid PennMex $181,000
and $125,000, respectively, for Mexico related expenses incurred by that
corporation on the Company's behalf. Such amounts were expensed (see note O).
During May 1999, the Company and PennWilson completed the sale of assets related
to the CNG business to a company controlled by a director and officer of the
Company (see note E).
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of July 31:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
LPG: $ 173,500 $ 173,500
Building 3,426,440 3,426,440
LPG terminal 391,137 388,839
Automobile and equipment 35,738 35,738
Office equipment 75,389 572,774
Capital construction in progress (see note O) 291,409 291,409
------------ ------------
Leasehold improvements 4,393,613 4,888,700
Less: accumulated depreciation and (1,485,362) (1,717,050)
------------ ------------
Amortization $ 2,908,251 $ 3,171,650
============ ============
</TABLE>
Depreciation and amortization expense of property, plant and equipment totaled
$448,019, $249,584 and $234,232 for the years ended July 31, 1997, 1998 and
1999, respectively. These amounts include CNG related depreciation of $13,059,
$14,854 and $10,105, respectively, which is included in discontinued operations
in the consolidated statements of operations.
45
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - INVENTORIES
Inventories consist of the following as of July 31:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
$276,938 $ 434,987
LPG: 100,159 180,169
Pipeline
LPG terminal
$377,097 $ 615,156
======== ==========
</TABLE>
NOTE I - BORROWINGS FROM IBC-BROWNSVILLE
The Company had short-term borrowings of $672,552 from International Bank
of Commerce-Brownsville as of July 31, 1998 (see note S).
NOTE J - INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at July 31, 1998 and 1999, were as
follows:
<TABLE>
<CAPTION>
1998 1999
----------------------- ------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
$ - $ 29,000 $ - $ -
(S) 263 and other inventory costs - 21,000 - 40,000
Depreciation 1,000 - - -
Capitalized start-up costs 5,000 - 5,000 -
Warranty reserves 142,000 - 177,000 -
Bad debt reserve 8,000 - - -
Amortization of professional fees 469,000 - 421,000 -
Deferred compensation expense 3,001,000 - 2,721,000 -
---------- ------------ ---------- ------------
Net operating loss carryforward 3,626,000 50,000 3,324,000 40,000
3,626,000 50,000 3,324,000 40,000
---------- ------------ ---------- ------------
Less: valuation allowance $ - $ - $ - $ -
========== ============ ========== ============
</TABLE>
There is no current or deferred tax expense for the years ended July 31, 1997,
1998 and 1999. The Company was in a loss position for 1997 and 1998 and
utilized net operating loss carryforwards in 1999.
Management believes that the valuation allowance reflected above is appropriate
because of the uncertainty that sufficient taxable income will be generated in
future taxable years by the Company to absorb the entire amount of such net
operating losses.
46
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES - Continued
At July 31, 1999, the approximate amount of net operating loss
carryforwards and expiration dates for U.S. income tax purposes were as follows:
<TABLE>
<CAPTION>
Year ending Tax Loss
July 31 Carryforward
- ----------- -------------
<S> <C>
$ 26,000
2009 2,372,000
2010 2,279,000
2012 3,326,000
-------------
2018 $ 8,003,000
=============
</TABLE>
Future changes in ownership, as defined by section 382 of the Internal Revenue
Code, could limit the amount of net operating loss carryforwards used in any one
year.
47
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following as of July 31:
1998 1999
---------- --------
<S> <C> <C>
Contract for Bill of Sale which was extended in April 1999; due in monthly
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building. $ 91,197 $ 50,347
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 -
Noninterest bearing note payable, discounted at 7%, for legal services, due in
Monthly installments of $10,000 - $20,000 through January 2001 with a final
payment of $110,000 in February 2001. - 387,129
Note payable for legal services in connection with the Duran litigation; payable in
monthly installments of $11,092, including interest at 6.9% (see note N). - 127,000
Other long-term debt. 62,700 60,000
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 collateralized by an assignment of net
proceeds received by the Company in connection with the Judgment (note N);
interest at 10.0% 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 -
1,753,897 624,476
Current maturities. 1,693,897 365,859
---------- --------
$ 60,000 $258,617
========== ========
</TABLE>
In connection with the notes to attorneys, the Company has agreed in the future
to provide a "Stipulation of Judgment" to the creditors in the event that the
Company defaults under the settlement agreements.
<TABLE>
<CAPTION>
Scheduled maturities are as follows:
Year ending July 31,
--------------------
<S> <C>
2000 $365,859
2001 258,617
--------
$624,476
========
</TABLE>
48
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY
SERIES A - PREFERRED STOCK: CONVERSION
- ------------------------------------------
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 (the Series A Preferred Stock). On June
10, 1994, the Company declared a 2-for-1 stock split. The Series A Preferred
Stock was convertible into voting shares of common stock of the Company at a
conversion ratio of one share of Series A 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 holders of the Series A Preferred Stock to convert the shares
of Series A Preferred Stock and release all rights with respect to the Series A
Preferred Stock. In January 1998, all 270,000 shares of the Series A 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 during the year ended July
31, 1998.
SERIES B - SENIOR PREFERRED STOCK
- --------------------------------------
At the 1997 Annual Meeting of Stockholders of the Company held on May 29,
1997, the stockholders authorized the amendment of the Company's Restated
Certificate of Incorporation to authorize 5,000,000 shares, $.01 par value per
share, of a new class of senior preferred stock (Series B Senior Preferred
Stock) for possible future issuance in connection with acquisitions and general
corporate purposes, including public or private offerings of shares for cash and
stock dividends.
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 $2.3 million, 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 March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
49
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
The Company has granted one demand registration right with respect to the
common stock referred to the preceding paragraph. The Company and the holder of
the common stock have agreed to share the costs of the registration.
During July 1999, the Company paid the remaining $600,000 of promissory
notes outstanding through a cash payment of $300,000 and the issuance of 166,667
shares of common stock of the Company as payment for and full cancellation of
$300,000 of promissory notes.
COMMON STOCK
-------------
In November 1996, the Company issued warrants to purchase 100,000 shares of
common stock of the Company to a third party to obtain the rights to construct,
own and operate a Dina dealership in Mexico. Grupo Dina, S.A. de C.V. (Dina) is
one of the largest bus and truck manufacturers in Mexico.
In January 1997, the Company issued 10,000 shares of common stock to an
advertising firm for services provided.
During February 1997, the Company and certain prior officers of the Company
(the Officers) agreed to an exchange offer whereby the Officers, on a weighted
average basis, received 164,286 shares of the Company's common stock in exchange
for outstanding warrants to purchase 702,856 shares of common stock of the
Company. The warrants were canceled.
During March 1997, the Company reduced from $5.00 per share to $2.50 per
share the exercise price of warrants to purchase 100,000 shares of common stock
of the Company held or controlled by a director of the Company.
During March 1997, the Company approved the issuance of warrants to
purchase 200,000 shares of common stock of the Company to a director and officer
of the Company, at an exercise price of $3.625 per share, exercisable on or
before March 24, 2000. As a bonus for the year ended July 31, 1997, on
September 10, 1997, the Company reduced the exercise price of the warrants to
$2.50 per share.
During March 1997, the Company approved the issuance of warrants to
purchase 200,000 shares of common stock of the Company to a director and officer
of the Company upon his one-year anniversary of employment with the Company.
The exercise price of the warrants was to be based on the closing stock price
the day prior to the issuance of the warrants and are exercisable three years
from the date of issuance. On September 10, 1997, the Company agreed to waive
the one-year requirement and immediately granted the warrants as a bonus for the
year ended July 31, 1997 at an exercise price of $2.50 per share exercisable on
or before September 9, 2000.
During March 1997, a related party exercised warrants to purchase 15,000
shares of common stock of the Company at an exercise price of $2.50 per share.
The consideration for the exercise of the warrants included $150 in cash and a
$37,350 promissory note. The note accrues interest at the rate of 8.25% per
annum to be paid annually on March 26 until the note is due in full on March 26,
2000. The payments due on March 26, 1998 and 1999 have not been received. The
promissory note has been recorded as a reduction of stockholders' equity. At
July 31, 1998 and 1999, interest receivable from the related party has been
reserved.
50
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
In April 1997, warrants were exercised for 250,000 shares of common stock of the
Company in exchange for the cancellation of $250,000 in outstanding notes plus
accrued interest thereon, and a cash payment received by the Company of
$188,438.
During April 1997, warrants to purchase 25,000 shares of common stock of
the Company were exercised.
During April 1997, additional warrants to purchase 300,000 shares of common
stock of the Company at an exercise price of $1.25 per share were exercised by a
director of the Company and other third parties.
During June 1997, in connection with the Secured Promissory Note, the
Company approved the issuance of warrants to purchase 500,000 shares of common
stock of the Company.
In August 1997, warrants to purchase 75,000 shares of common stock of the
Company were exercised in exchange for cancellation of a $75,000 note payable,
plus accrued interest thereon, and a cash payment to the Company of $56,250.
During August 1997, warrants to purchase a total of 430,000 shares of
Common Stock were exercised, resulting in cash proceeds to the Company of $1.1
million. The proceeds of such exercises were used for working capital and
repayment of Company debt.
On August 29, 1997, in connection with the exercise of warrants to purchase
100,000 shares of Common Stock of the Company by an unrelated third party, the
Company entered into a Registration Rights Agreement requiring that the Company
either register the Common Stock issued upon exercise on or before February 1,
1998 or issue additional warrants to acquire up to 60,000 shares of common
stock. In accordance with the Registration Rights Agreement, the Company issued
warrants to purchase 60,000 shares of Common Stock to the unrelated third party
at an exercise price of $2.50 per share, exercisable within one year from the
date of issuance.
Effective April 7, 1998, the Company issued 258,163 shares of Common Stock
in satisfaction of all principal and interest owing on the Secured Promissory
Note, which totaled $1,032,652 as of April 7, 1998.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 125,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 13, 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 were 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. In connection therewith, the Company has no
further obligation to pay any future royalties in connection with the Company's
purchase of certain CNG assets from Wilson Technologies Inc., a wholly owned
subsidiary of ZHI.
51
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
During December 1998, the Company issued 15,000 shares of common stock of the
Company and warrants to purchase 10,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of December 31, 2000 in
exchange for cancellation of all outstanding obligations totaling approximately
$22,500 and other obligations as outlined in an agreement between the parties.
On March 18, 1999, the Company issued 120,000 shares of common stock of the
Company and warrants to purchase 60,000 shares of common stock with an exercise
price of $2.25 per warrant and an expiration date of March 18, 2002 for an
amount of $150,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 60,606 shares of common stock of the
Company and warrants to purchase 30,303 shares of common stock with an exercise
price of $2.59 per warrant and an expiration date of March 19, 2002 for an
amount of $100,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 146,667 shares of common stock of the
Company and warrants to purchase 73,333 shares of common stock with an exercise
price of $2.42 per warrant and an expiration date of March 19, 2002 for an
amount of $220,000. Net proceeds from the sale were used for working capital
purposes.
In connection with the stock issuances in March 1999, the Company issued a total
of 35,000 shares of common stock of the Company, representing the fees
associated with the transactions.
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000. Net proceeds from the sale were used for working capital purposes.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000. Net proceeds from the sale were used for working capital purposes.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000. Net proceeds from the sale were used for working capital purposes.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration dates of July 29, 2003 and July 30, 2003 for a cash payment
of $600,000 and the full cancellation of notes payable of $200,000. Net
proceeds from the sale were used for working capital purposes and to pay down
$300,000 of debt obligations (See Preferred Stock above).
In connection with the stock issuances on July 29, 1999 and July 30, 1999, the
Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with an exercise price of $3.00 per
warrant and an expiration date of July 30, 2003 representing the fees associated
with the transactions. The cash fee was netted against the proceeds from the
sale of the common stock.
During July 1999, the Company issued 66,667 shares of common stock of the
Company as payment for and full cancellation of a note payable of $100,000 (See
Preferred Stock above).
52
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
During August 1999, warrants to purchase a total of 425,000 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $681,233. The proceeds of such exercises were used for working capital
purposes.
In connection with previous warrants issued by the Company, certain of these
warrants contain a call provision whereby the Company has the right to purchase
the warrants for a nominal price if the holder of the warrants does not elect to
exercise the warrants within the prescribed period.
REGISTRATION RIGHTS
- --------------------
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The obligations of the Company with
respect to the Registrable Securities include one-time demand registration
rights and/or piggy-back registration rights (the "Registration"). The Company
is required to file an effective registration by either September 19, 1999,
December 1, 1999 or January 31, 2000. In connection with the Registration of
the Registrable Securities, the Company is required to provide notice to the
holder of the Registrable Securities, who may or may not elect to be included in
the Registration. The Company is obligated to register the Registrable
Securities even though the Registrable Securities may be tradable under Rule
144. The Company did not file a registration statement for the shares agreed
to be registered by September 19, 1999. The Company has also received notice
of a demand for registration for certain of the Shares. The Registration Rights
Agreements do not contain provisions for damages, if the Registration is not
completed except for those Shares required to be registered on December 1, 1999,
whereby for each month after December 1999 and if the Company fails to have an
effective registration statement, the Company will be required to pay a penalty
of $80,000 to be paid in cash and/or common stock of the Company based on the
then current trading price of the common stock of the Company.
The total amount of shares and warrants subject to registration at September 30,
1999, are as follows:
Unexercised
Shares Warrants
--------- -----------
Demand Registration Rights 1,400,000 -
Piggy-Back Registration Rights 1,358,940 1,046,136
--------- -----------
Total Registrable Securities 2,758,940 1,046,136
========= ===========
Registration Rights Subject To
Penalty* 400,000 200,000
* Also entitled to piggy-back registration rights
53
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
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 124,686 shares were unissued as of July
31, 1999, 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.
In April 1999, the Company issued 5,000 shares of Common Stock to a consultant
in payment for services rendered to the Company valued at $8,750 pursuant to the
plan.
NOTE M - STOCK WARRANTS
The Company applies APB 25 for warrants granted to the Company's employees. The
compensation cost recorded in the consolidated statements of operations for
warrants granted to employees totaled $837,600 and $0 for the years ended July
31, 1997 and 1999, respectively. No warrants granted to Employees during the
year ended July 31, 1998.
As bonuses to four of its executive officers for the year ended July 31, 1999,
the Company granted each executive warrants to purchase 30,000 shares of common
stock at an exercise price of $2.50 per share through July 30, 2004. The
exercise price per share of the warrants was greater than the quoted market
price per share at the measurement date. Based on the provisions of APB 25, no
compensation expense was recorded for the bonuses.
Had compensation cost related to the warrants granted to employees been
determined based on the fair value at the grant dates, consistent with the
methodology of SFAS 123, the Company's pro forma net loss and loss per share
would have been as follows for the years ended July 31, 1997 and 1999:
54
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK WARRANTS - CONTINUED
<TABLE>
<CAPTION>
1997 1999
---------------- ----------
<S> <C> <C>
Income (loss) from continuing operations as reported $ (2,886,067) $1,124,558
Income (loss) from continuing operations proforma (3,018,023) 896,958
Net income (loss) as reported (2,922,659) 545,445
Net income (loss) proforma (3,054,615) 317,845
Income (loss) from continuing operations per common share as reported (.47) .11
Income (loss) from continuing operations per common share proforma (.49) .08
Net income (loss) per common share as reported (.48) .05
Net income (loss) per common share proforma (.50) .03
Income (loss) from continuing operations per common
share assuming dilution as reported (.47) .10
Income (loss) from continuing operations per common
share assuming dilution proforma (.49) .08
Net income (loss) per common share assuming dilution as
reported (.48) .05
Net income (loss) per common share assuming dilution
proforma (.50) .03
</TABLE>
The following assumptions were used for two grants of warrants to employees in
the year ended July 31, 1997 to compute the fair value of the warrants using the
Black-Scholes option-pricing model: dividend yield of 0% for both grants;
expected volatility of 95% and 90%; risk-free interest rate of 7% for both
grants; and expected lives of 3 years for both grants.
The following assumptions were used for two grants of warrants to employees in
the year ended July 31, 1999 to compute the fair value of the warrants using the
Black Scholes option-pricing model; dividend yield of 0% for both grants;
expected volatility of 92% and 94%; risk free interest rate of 7% for both
grants; and expected lives of 3 and 5 years.
For warrants granted to non-employees, the Company applies the methodology of
SFAS 123 to determine the fair market value of the warrants issued. Costs
associated with warrants granted to non-employees for the years ended July 31,
1997, 1998 and 1999, totaled $92,185, $30,000 and $0, respectively. Warrants
granted to non-employees simultaneously with the issuance of debt are accounted
for based on the guidance provided by APB 14, "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants".
55
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK WARRANTS - CONTINUED
A summary of the status of the Company's warrants as of July 31, 1997, 1998 and
1999, and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
---------------
Average Average Average
Warrants Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------ ----------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 4,680,000 $ 1.84 2,215,000 $ 2.61 1,430,000 $ 3.15
Granted 1,325,000 2.66 300,000 5.42 1,451,136 2.27
Exercised (3,492,856) 1.55 (505,000) 2.57 - -
Expired (297,144) 2.56 (580,000) 2.76 (290,000) 2.67
----------- ---------- ----------
Outstanding at end of year 2,215,000 2.61 1,430,000 3.15 2,591,136 2.71
=========== ========== ==========
Warrants exercisable at end of
year 2,015,000 1,430,000 2,591,136
</TABLE>
The following table depicts the weighted-average exercise price and weighted
average fair value of warrants granted during the years ended July 31, 1997,
1998 and 1999 by the relationship of the exercise price of the warrants granted
to the market price on the grant date:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
For warrants granted For warrants granted For warrants granted
Weighted Weighted Weighted Weighted Weighted Weighted
Exercise price compared to average average average average average average
market price on grant date Fair value exercise price Fair value exercise price fair value Exercise price
- -------------------------- ----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Equals market price $ - $ - $ - $ - $ - $ -
Exceeds market price 0.30 3.00 - - 1.03 2.27
Less than market price 1.64 2.50 2.07 5.42 1.98 2.50
</TABLE>
The fair value of each warrant grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ending July 31, 1997, 1998 and 1999,
respectively: dividend yield of 0% for all three years, expected volatility of
88%, 85% and 92%, risk-free interest rate of 7% for all three years and expected
lives of 3, 3 and 3.5 years.
The following table summarizes information about the warrants outstanding at
July 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------- ------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at Contractual Exercise at Exercise
Range of Exercise Prices July 31, 1999 Life Price July 31, 1999 Price
- ------------------------- ------------- ----------- --------- ------------- ---------
1.25 to $2.50 1,915,833 3.31 years $ 2.16 1,915,833 $ 2.16
2.59 to $3.25 375,303 3.59 3.04 375,303 3.04
5.00 to $6.00 300,000 1.39 5.83 300,000 5.83
------------- -------------
2.50 to $6.00 2,591,136 2.61 $ 2.71 2,591,136 $ 2.71
============= =============
</TABLE>
56
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 16, 1999, the Company settled in mediation a lawsuit with its former
chairman of the board, Jorge V. Duran. In connection therewith and without
admitting or denying liability, the Company agreed to pay Mr. Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is to be paid by the Company's insurance carrier. Litigation costs totaled
$221,391. The Company has agreed to register the stock in the future.
In October 1996, the Company and Mr. Richter, without admitting or denying the
findings contained therein (other than as to jurisdiction), consented to the
issuance of an order by the Securities and Exchange Commission (the "SEC") in
which the SEC (i) made findings that the Company and Mr. Richter had violated
portions of Section 13 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the filing of periodic reports and the maintenance
of books and records, and certain related rules under the Exchange Act, and (ii)
ordered respondent to cease and desist from committing or causing any current or
future violation of such section and rules.
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 to date by Amwest of approximately
$160,000 on claims made against the performance and payment bonds in connection
with services provided by suppliers, laborers and other materials and work to
complete the NYDOT contract (Vendors). These amounts were previously recorded
in the Company's balance sheet at the time of the complaint. In addition,
Amwest was seeking pre-judgment for any amounts ultimately paid by Amwest
relating to claims presented to Amwest against the performance and payment
bonds, but have not yet been authorized or paid to date by Amwest. In May 1999,
the Company and PennWilson reached a settlement agreement with Amwest whereby
Amwest will be reimbursed $160,000 by PennWilson for the payments made to the
Vendors, with the Company acting as guarantor. Upon satisfactory payment,
Amwest will dismiss its pending claims related to the payment bond. On October
12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant to the NYDOT contract. The Company is currently considering its legal
options and intends to vigorously defend against the claims made against the
performance bond but not yet paid by Amwest.
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
As of July 31, 1999, the Company has 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) 2.5% of the
maximum face amount of such letter of credit, or (iii) such higher amount as may
be agreed to between the Company and RZB. Any 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 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.
57
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
In connection with the Company's purchases of LPG from Exxon and/or PG&E NGL
Marketing, L.P.(PG&E), the Company issues letters of credit on a monthly basis
based on anticipated purchases.
As of July 31, 1999, letters of credit established under the RZB Credit Facility
in favor of Exxon for purchases of LPG totaled $5,994,997 of which $2,850,197
was being used to secure unpaid purchases from Exxon. In connection with these
purchases, the Company had unpaid invoices due from PMI totaling $2,459,427 and
cash balances maintained in the RZB Credit Facility collateral account of
$847,042 as of July 31, 1999.
Interest costs on the RZB Credit Facility totaled $97,986 and $217,179 for the
years ended July 31, 1998 and 1999.
OPERATING LEASE COMMITMENTS
The Company has lease commitments for its pipeline, land, office space and
office equipment. The Pipeline Lease originally required fixed monthly payments
of $45,834 ($550,000 annually) and monthly service payments of $8,000 through
March 2004. The service payments are subject to an annual adjustment based on a
labor cost index and an electric power cost index. As provided in the Pipeline
Lease, the Company has the right to use the Pipeline solely for the
transportation of LPG belonging only to the Company and not to any third party.
The lessor has the right to terminate the lease agreement under certain limited
circumstances, which management currently believes are remote, as provided for
in the lease agreement at specific times in the future by giving twelve months
written notice. The Company can also terminate the lease at any time by giving
thirty days notice only if its sales agreement with its main customer is
terminated. The Company can also terminate the lease at any time after the
fifth anniversary date of the lease by giving twelve months notice. Upon
termination by the lessor, the lessor has the obligation to reimburse the
Company the lesser of 1) net book value of its liquid propane gas terminal at
the time of such termination or 2) $2,000,000.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Agreement") entered into between the Company and
Seadrift on May 21, 1997, which became effective on January 1, 1999 (the
"Effective Date"). The Pipeline Lease Amendment provides, among other things,
for additional storage access and inter-connection with another pipeline
controlled by Seadrift, which the Company believes will provide 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 less certain adjustments during the first two years from the
Effective Date and the Company is required to pay for a minimum volume of
storage of $300,000 per year beginning the second year from the Effective Date.
In addition, the Pipeline Lease Amendment also provides for variable rental
increases based on monthly volumes purchased and flowing into the Pipeline and
storage utilized. The Company has made all payments required under the Pipeline
Lease Agreement.
The operating lease for the land expires in October 2003. In May 1997, the
Company amended its lease ("Brownsville Lease") with the Brownsville Navigation
District ("District") to include rental of additional space adjacent to the
existing terminal location. Effective April 15, 1997, the lease amount was
increased to $74,784 annually.
The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment. The Brownsville
Lease provides, among other things, that if the Company complies with all the
conditions and covenants, the leasehold improvements made to the Brownsville
Terminal Facilities by the Company may be removed from the premises or otherwise
disposed of by the Company at the termination of the Brownsville Lease. In the
event of a breach by the Company of any of the conditions or covenants, all
improvements owned by the Company and placed on the premises shall be considered
part of the real estate and shall become the property of the District.
58
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASE COMMITMENTS - CONTINUED
The Company leases its executive offices, which are located in Redwood
City, California. The monthly rental is $4,910 through October 1999.
Beginning November 1, 1999, the Company will relocate its executive offices to
Palm Desert, California. The lease on the Palm Desert facility expires October
31, 2002. The monthly lease payments are approximately $3,000.
Rent expense was $781,750, $954,924 and $1,123,821 for the years ended July
31, 1997, 1998 and 1999, respectively. In addition, rent expense associated
with operating leases for leased equipment and furniture was $14,017, $38,178
and $28,332 for the years ended July 31, 1997, 1998 and 1999. As of July 31,
1999, the minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending July 31, $ 1,125,288
- --------------------
<S> <C>
2000 1,090,819
2001 1,089,984
2002 1,067,034
2003 1,000,180
2004 8,450,000
-----------
Thereafter $13,823,305
===========
</TABLE>
CAPITALIZED LEASE COMMITMENT
The following table is a schedule by years (assuming the Substantial Completion
Date is January 1, 2000) of the estimated future minimum lease payments under
the Lease Agreements for the US - Mexico Pipeline and Mexican Terminal Facility
together with the present value of the net minimum lease payments net of the 30%
interest purchased subsequent to July 31, 1999 (see note O):
<TABLE>
<CAPTION>
Year ending July 31,
- -------------------------------------------------------------------
<S> <C>
2000 $ 785,000
2001 1,884,000
2002 1,884,000
2003 1,884,000
2004 1,884,000
Later years 19,939,000
-----------------
Total minimum lease payments 28,260,000
Less: Amount representing estimated executory costs for operations ( 3,600,000)
-----------------
24,660,000
Less: Amounts related to the purchased interest - see note O ( 7,243,567)
-----------------
Net minimum lease payments 17,416,433
Less: Amount representing interest ( 9,016,130)
-----------------
Present value of net minimum lease payments $ 8,400,303
=================
</TABLE>
59
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
EMPLOYMENT CONTRACTS
The Company has a six year employment agreement with the President for the
period through January 31, 2001. Under that agreement, he is entitled to
receive $300,000 in annual compensation equal to a monthly salary of $25,000
until earnings exceed a gross profit of $500,000 per month, whereupon he is
entitled to an increase in his salary to $40,000 per month for the first year of
the agreement increasing to $50,000 per month during the second year of the
agreement. He is also entitled to (i) an annual bonus of 5% of all pre-tax
profits of the Company, (ii) options for the purchase of 200,000 shares of
Common Stock that can be exercised under certain circumstances at an option
price of $7.50 per share (giving effect to a 2-for-1 stock split on June 10,
1994), and (iii) a term life insurance policy commensurate with the term of
employment agreement, equal to six times his annual salary and three times his
annual bonus. The employment agreement also entitles him to a right of first
refusal to participate in joint venture opportunities in which the Company may
invest, contains a covenant not to compete until one year from the termination
of the agreement and restrictions on use of confidential information. Through
July 31, 1997, he waived his right to his full salary. Through July 31, 1999,
he waived his right to receipt of the stock options, bonus on pre-tax profits
and the purchase by the Company of a term life insurance policy. In the future,
he may elect not to waive such rights. At July 31, 1998, $77,000 of salary due
to the President has been offset against the interest receivable from the
President (see note F).
In November 1997, the Company entered into an employment agreement with an
employee of the Company. Under the terms of the agreement, the employee is
entitled to receive $120,000 in annual compensation, plus $1,000 monthly for an
automobile allowance. The Agreement is for two years and may be terminated by
the Company or the employee. The agreement provides for the issuance of
warrants for the purchase of 50,000 shares of Common Stock of the Company with
an exercise price of $5.00 per share to expire November 16, 2001. The agreement
also provides for the issuance of an additional 50,000 upon the second
anniversary of the agreement.
Aggregate compensation under employment agreements totaled $174,524, $391,078
and $432,000 for the years ended July 31, 1997, 1998 and 1999, respectively,
which included agreements with former executives. Minimum salaries under the
remaining agreements are as follows:
Year ending July 31, Salaries
----------------------- --------
2000 $336,000
2001 150,000
NOTE O - LPG EXPANSION PROGRAM (EXPANSION)
On July 26, 1999, the Company was granted a permit by the United States
Department of State authorizing the Company to construct, maintain and operate
two pipelines (the "US Pipeline") crossing the international boundary line
between the United States and Mexico (from the Brownsville Terminal Facilities
near the Port of Brownsville, Texas and El Sabino, Mexico) for the transport of
LPG and refined products (motor gasoline and diesel fuel) [the "Refined
Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V. ("PennMex"),
see below, received a permit from the Comision Reguladora de Energia (the
"Mexican Energy commission") to build and operate one pipeline to transport LPG
(the "Mexican Pipeline") [collectively, the US Pipelines and the Mexican
Pipeline are referred to as the "US-Mexico Pipeline"] between El Sabino (at the
point North of the Rio Bravo) and to a terminal facility in the City of
Matamoros, State of Tamaulipas, Mexico (the "Mexican Terminal Facilities").
60
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - LPG EXPANSION PROGRAM (EXPANSION) - CONTINUED
In addition to the Expansion, the Company has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") at an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for the
purpose of operating LPG terminal facilities in Mexico, including the Mexican
Terminal Facilities and the planned Saltillo Terminal Facilities and future LPG
terminal facilities in Mexico. The Company anticipates Tergas will be issued the
permit to operate the Mexican Terminal Facilities.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico Pipeline (including an additional pipeline to accommodate refined
products) and the Mexican Terminal Facilities and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company will pay monthly
rentals of approximately $157,000, beginning the date that the US-Mexico
Pipeline and Mexican Terminal Facilities are physically capable to transport and
receive LPG in accordance with technical specifications required (the
"Substantial Completion Date"). In addition, the Company has agreed to provide
a lien on certain assets, leases and contracts which are currently pledged to
RZB, and provide CPSC with a letter of credit of approximately $1,000,000. The
Company is currently in negotiations with RZB and CPSC concerning RZB's
subordination of RZB's lien on certain assets, leases and contracts. The
Company also has the option to purchase the US-Mexico Pipeline and the Mexican
Terminal Facilities at the end of the 10th year anniversary and 15th year
anniversary for $5,000,000 and $100,000, respectively. Under the terms of the
Lease Agreements, CPSC is required to pay all costs associated with the
construction design and maintenance of the US-Mexico Pipeline and Mexican
Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC agreed to
accept 500,000 shares of common stock of the Company owned by the President of
the Company (the "Collateral") in place of the letter of credit originally
required under the Lease Agreements. The Collateral shall be replaced by a
letter of credit or cash collateral over a ten month period beginning monthly
after the Substantial Completion Date. In addition, the Company has agreed to
guaranty the value of the Collateral based on the fair market value of the
Collateral for up to $1,000,000.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date.
On September 16, 1999, the Company and CPSC entered into an option agreement
whereby the Company will purchase a 30% interest (the "Purchased Interests") in
the US-Mexico Pipeline and the Mexican Terminal Facilities for $3,000,000. In
connection with the Purchased Interests, the Company will not assume any costs
associated with CPSC's obligations under the Lease Agreements until the
Substantial Completion Date is reached, and the Company will receive a minimum
of $54,000 per month from the Company's payments under the Lease Agreements
(approximately 34% of the Company's monthly lease obligations under the Lease
Agreements). The Company is required to pay for the Purchased Interests on
January 3, 2000, or 10 days subsequent to the Substantial Completion Date,
whichever is later (the "Closing Date"). To secure the payment of the
$3,000,000 for the Purchased Interests, the Company has agreed to assign its
interest in the net cash proceeds to be received from the IBC-Brownsville award
judgment (the "Judgment"). In the event that the net cash received from the
Judgment is less than $3,000,000, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
61
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - LPG EXPANSION PROGRAM (EXPANSION) - CONTINUED
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2,000,000 and $7,000,000, respectively, within 90 days from the Closing Date.
The Company paid $50,000 to obtain the Options.
The actual costs to complete the US-Mexico Pipelines and Mexican Terminal
Facilities are the sole responsibility of CPSC ("the Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
PennMex and/or Tergas are currently the owners of the land which is being
utilized for the Mexican Pipeline and Mexican Terminal Facilities, own the
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipeline and have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities. In addition, the Company has advanced funds to PennMex
and/or Tergas in connection with the purchase of assets associated with the
Mexican Pipeline, Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
Both PennMex and Tergas are Mexican companies which are owned 90% and 95%,
respectively, by Jorge R. Bracamontes, an officer and director of the Company
and the balance by other citizens of Mexico.
Under current Mexican law, foreign ownership of Mexican entities involved in the
distribution of LPG and the operation of LPG terminal facilities are prohibited.
However, transportation and storage of LPG by foreigners is permitted (see note
T).
NOTE P - FOURTH QUARTER ADJUSTMENTS - UNAUDITED
The net loss for the quarter ended July 31, 1999, was primarily attributable to
increases in the following expenses (i) settlement of litigation of $501,416,
(ii) the discount of the note receivable in connection with the sale of the CNG
assets of $260,000, and (iii) an increase in the allowance for uncollectable
receivables of $111,431.
The net loss for the quarter ended July 31, 1998, was primarily attributable to
increases in the following expenses: (1) warrants issued in connection with the
registration rights agreement of $160,542, (2) the write-off of deferred
registration costs of $385,491, (3) professional fees of $425,769, (4) an
allowance for uncollectable receivables of $38,880, (5) salary related costs of
$77,000, (6) approximately $1.0 million of losses associated with the
construction of CNG equipment for sale to third parties, (7) a $400,000 asset
impairment loss associated with the Company's CNG assets and (8) a reserve for
the interest receivable from the President and a related party of $223,000.
The net loss for the quarter ended July 31,1997 was primarily attributable to
increases in the following selling, general and administrative expenses: (1)
stock based compensation of $838,000, (2) PennWilson expenses of $125,000, (3)
professional fees of $388,000, and (4) travel expenses of $125,000.
NOTE Q - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has had an accumulated deficit since
inception, has used cash in operations, and has had a deficit in working
capital. In addition, the Company is involved in litigation, the outcome of
which cannot be determined at the present time. Although the Company has entered
into the Lease Agreements, the acquisition of the interests in PennMex and the
operating agreement with Tergas have yet to be consummated. As discussed in note
A, the Company has historically depended heavily on sales to one major customer.
62
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REALIZATION OF ASSETS - CONTINUED
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 (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, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital.
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,000,000. 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.
NOTE R - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement, as amended, (Agreement)
with PMI, its major customer, to provide a minimum monthly volume of LPG to PMI
through March 31, 2000. Sales to PMI for the years ended July 31, 1997, 1998
and 1999 totaled $28,836,820, $30,511,480, and $35,204,102 respectively,
representing 97%, 99% and 99% of total revenues for each year. The Company is
currently purchasing LPG from major suppliers to meet the minimum monthly
volumes required in the Agreement. The suppliers' prices are below the sales
price provided for in the Agreement (see note T).
CNG BUSINESS
Prior to July 31, 1998, the Company was awarded two contracts for the design,
construction and installation of equipment for CNG fueling stations for A.E.
Schmidt Environmental in connection with CNG fueling stations being constructed
for NYDOT (total contract amount of approximately $1.5 million) and the County
Sanitation Districts of Orange County, California (Orange County) (total
contract amount of approximately $251,000). In connection with the NYDOT and
Orange County contracts, Amwest and Orange County had filed suit against the
Company and the parties have subsequently reached settlement agreements (see
notes D, E and N).
The Company has not entered into any other CNG contracts.
CONSULTING COMMISSION AGREEMENT
The Company has entered into an incentive arrangement with several
consultants (the "Arrangement") whereby the Company will pay a commission based
on $.001 plus 5% of every $.01 of gross margin in excess of $.0425 earned by the
Company in connection with the LPG sales of the Company, so long as the volume
is in excess of 7.5 million gallons per month. The Arrangement became effective
July 1, 1999 and is renewable annually. The amounts owed by the Company to the
Consultants for the period from July 1, 1999 through July 31, 1999, were not
material.
63
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - AWARD FROM 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. On December 30, 1998, the Court denied the
IBC-Brownsville request for rehearing. On February 16, 1999, IBC-Brownsville
filed a petition for review with the Supreme Court of Texas. On May 10, 1999
the Company responded to the Supreme Court of Texas' request for response of the
Petitioner's petition for review. On May 27, 1999, IBC-Brownsville filed a
reply with the Supreme Court of Texas to the Company's response of the
Petitioner's petition for review. On June 10, 1999, the Supreme Court of Texas
denied the Petitioner's petition for review. During July 1999, the Petitioner
filed an appeal with the Supreme Court of Texas to rehear the Petitioner's
petition for review. On August 26, 1999, the Supreme Court of Texas upheld its
decision to deny the Petitioner's petition for review. As of July 31, 1999, the
net amount of the Judgment is approximately $3,900,000, which is comprised of
(i) the original judgment, including attorneys' fees, (ii) post-award interest,
and (iii) cancellation of the note and accrued interest payable to
IBC-Brownsville, less attorneys' fees. There is no certainty that
IBC-Brownsville will not continue to seek other legal remedies against the
Judgment.
For the year ended July 31, 1999, the Company has recognized a gain of
approximately $987,000, which represents the amount of the Judgment which was
recorded as a liability on the Company's balance sheet at December 31, 1998 (see
note I). The remaining net amount of the Judgment to be realized by the Company
is approximately $3,900,000, less attorneys fees. In addition, a former officer
of the Company is entitled to 5% of the net proceeds from the Judgment (after
expenses and legal fees). The Company will recognize the remaining amount of
the Judgment when it realizes the proceeds associated with the Judgment.
NOTE T - SUBSEQUENT EVENTS - UNAUDITED
Effective October 1, 1999 (the "Closing Date"), the Company and Exxon entered
into a ten year LPG supply contract (the "Exxon Supply Contract"), whereby Exxon
has agreed to supply and the Company has agreed to take, the supply of propane
and butane available at Exxon's King Ranch Gas Plant (the "Plant") which is
estimated to be between 10,100,000 gallons per month and 13,900,000 gallons per
month blended in accordance with the specifications as outlined under the PMI
Sales Agreement (the "Plant Commitment"), with a minimum of 10,100,000 gallons
per month guaranteed by Exxon to be provided to the Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7,700,000 gallons into the CCPL during
the first quarter from the date that the CCPL is operational, approximately
92,000,000 gallons the following year and 122,000,000 gallons each year
thereafter and continuing for four years.
64
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - SUBSEQUENT EVENTS - UNAUDITED - CONTINUED
The Exxon Supply Contract currently requires that the Company purchase a minimum
supply of LPG, which is significantly higher than committed sales volumes under
the PMI Sales Agreement. In addition, the Company is required to pay additional
fees associated with the Additional Propane Supply, which will increase its LPG
costs by a minimum of $.01 per gallon without considering the actual cost of the
Additional Propane Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E") entered
into a three year supply agreement (the "PG&E Supply Agreement") whereby PG&E
has agreed to supply and the Company has agreed to take, a monthly average of
2,500,000 gallons (the "PG&E Supply") of propane. In addition, PG&E is in the
process of obtaining up to 3,800,000 gallons per month of additional propane
commitments, which if successful by December 31, 1999, would be an adjustment to
the PG&E Supply. Under the PG&E Supply Agreement, the Company is not obligated
to purchase the PG&E Supply until the CCPL is operational, anticipated to be
during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be delivered
to the CCPL, as described above, and blended to the proper specifications as
outlined under the PMI sales Agreement. In addition, by utilizing the PG&E
Supply, the Company would satisfy the CCPL Supply requirements under the Exxon
Supply Contract.
The Company may incur significant additional costs associated with the storage,
disposal and/or changes in LPG prices resulting from the excess of the Plant
Commitment and PG&E Supply over actual sales volumes. Furthermore, the
Company's existing letter of credit facility may not be adequate and the Company
may require additional sources of financing to meet the letter of credit
requirements under the Exxon Supply Agreement and the PG&E Supply Agreement.
During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board approved the implementation of a plan to compensate each outside director
serving on the Board (the Plan). Under the Plan, all outside directors upon
election to the Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares of common stock of the Company for each year of service as a director.
Such warrants will expire five years after the warrants become vested. The
exercise price of the warrants issued under the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting of the warrants, and the warrants will vest monthly over a one year
period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously elected and serving on the Board at September 3, 1999. In addition,
the Board granted those directors warrants to purchase 20,000 shares of common
stock, at an exercise of $2.50 per share with the vesting period to commence on
August 1, 1999.
In October 1999, the Company received a verbal opinion from the Foreign
Investment Section of the Department of Commerce and Industrial Development
("SECOFI") that the operation of the leases in Mexico (see note O) would be
considered as a transportation rather than a distribution activity, and
therefore, could be performed by a foreign entity or through a foreign-owed
Mexican entity. The Company intends to request a ruling from SECOFI confirming
the verbal opinion. On November 8, 1999, the Company and Jorge Bracamontes and
the other shareholders entered into a purchase agreement to acquire up to 75% of
the common stock of PennMex for a nominal amount. The purchase agreement is
subject to among other things, the receipt of the aforementioned ruling. The
Company intends to contract with Tergas for services to be performed by Tergas
at the Mexican Terminal Facilities and the Saltillo Terminal Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of Mexico,
which among other things, require that Mexican subsidiaries of foreign entitles
comply with transfer pricing rules, the payment of income and/or asset taxes,
and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
On October 21, 1999, the RZB Credit Facility was increased from $6,000,000 to
$10,000,000. All other terms and conditions of the RZB Credit Facility remain
unchanged.
65
<PAGE>
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expenses(1) Other Accounts Deductions of Period
- ---------------- ------------- ------------ --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended July
- ----------------
31, 1999
- ----------------
Allowance for
Doubtful
Accounts $ 418,796 $ 116,432 $ - $ 14,161 $ 521,067
Year ended
- ----------------
July 31, 1998
- ----------------
Allowance for
doubtful
accounts $ 53,406 $ 373,130 $ - $ 7,740 $ 418,796
Year ended July
- ----------------
31, 1997
- ----------------
Allowance for
doubtful
accounts $ - $ 53,406 $ - $ - $ 53,406
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
66
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND OFFICERS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name of Director Age Positions and Offices Held
- ---------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jerome B. Richter 63 Chairman, President, Chief Executive Officer and
Director
Jorge R. Bracamontes 35 Executive Vice President, Secretary and Director
Ian T. Bothwell 39 Vice President, Treasurer, Assistant Secretary, Chief
Financial Officer and Director
Jerry L. Lockett 58 Vice President
Kenneth G. Oberman 39 Director
Stewart J. Paperin 51 Director
</TABLE>
All directors were elected at the 1997 Annual Meeting of Stockholders of
the Company held on May 29, 1997 and hold office until the next annual meeting
of shareholders and until their successors are duly elected and qualified.
Executive officers of the Company are elected annually by the Board of Directors
and serve until their successors are duly elected and qualified.
JEROME B. RICHTER founded the Company and served as its Chairman of the
Board and Chief Executive Officer from the date of its organization in August
1992 to December 1994, when he resigned from such positions and became Secretary
and Treasurer of the Company. He resigned on August 1, 1996. Effective October
29, 1996, Mr. Richter was elected Chairman of the Board, President and Chief
Executive Officer of the Company.
JORGE R. BRACAMONTES was elected a director of the Company in February
1996. Effective October 29, 1996, he was elected Executive Vice President and
Secretary of the Company. Mr. Bracamontes also serves as President and Chief
Executive Officer of PennMex and Tergas (see note O to the Consolidated
Financial Statements). Prior to joining the Company, Mr. Bracamontes was
General Counsel for Environmental Matters at Pemex, for the period from May 1994
to March 1996. During the period from November 1992 to May 1994, Mr.
Bracamontes was legal representative for Pemex in New York.
IAN T. BOTHWELL was elected Vice President, Treasurer, Assistant Secretary
and Chief Financial Officer of the Company on October 29, 1996 and a director of
the Company on March 25, 1997. Since July 1993, Mr. Bothwell has been a
principal of Bothwell & Asociados, S.A. de C.V., a Mexican management consulting
and financial advisory company that was founded by Mr. Bothwell in 1993 and
specializes in financing infrastructure projects in Mexico. During the period
from February 1993 through November 1993, Mr. Bothwell was a senior manager with
Ruiz, Urquiza y Cia., S.C., the affiliate in Mexico of Arthur Andersen L.L.P.,
an accounting firm. Mr. Bothwell also serves as CEO of B & A Eco-Holdings,
Inc., the company formed to purchase the Company's CNG assets (see note E to the
Consolidated Financial Statements).
JERRY L. LOCKETT joined the Company as a Vice President on November 17,
1998. Prior to joining the Company, Mr. Lockett held a variety of positions
during a thirty-one year career with Union Carbide Corporation in sales
management, hydrocarbon supply and trading, and strategic planning. He also
served in a management position with Union Carbide's wholly-owned pipeline
subsidiaries.
67
<PAGE>
KENNETH G. OBERMAN has been a Director of the Company since its
organization in August 1992. Since 1998, Mr. Oberman has served as Vice
President. From 1996 to 1998, Mr. Oberman was Senior Director of Fujitsu
Computer Products of America, a computer peripherals company based in San Jose,
California. From 1994 through 1995, Mr. Oberman held the position of Business
Unit Manager for Conner Peripherals, a computer peripherals company based in San
Jose, California. During the period from 1992 through 1994, Mr. Oberman served
as Vice President of International Economic Development Corporation, a
consulting company to the Ministry of Sports of the Government of Russia
involved in the sale of sporting goods and sports apparel based in Moscow,
Russia.
STEWART J. PAPERIN was elected a director of the Company in February 1996.
Mr. Paperin has been Managing Director of Lionrock Partners Ltd., a management
consulting and investment firm, and Managing Director of Capital Resources East,
a management consulting firm, since 1993. From 1990 to 1993, Mr. Paperin served
as President of Brooke Group International, an international trading company and
a subsidiary of Brooke Group Ltd.
Mr. Oberman is Mr. Richter's step-son. There are no other family
relationships among the Company's officers and directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In October, 1996 the Company and Mr. Richter, Chairman and President,
without admitting or denying the findings contained therein (other than as to
jurisdiction), consented to the issuance of an order by the SEC in which the SEC
(i) made findings that the Company and Richter had violated portions of Section
13 of the Exchange Act relating to the filing of periodic reports and the
maintenance of books and records, and certain related rules under said Act, and
(ii) ordered respondents to cease and desist from committing or causing any
current or future violation of such sections and rules.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the SEC. Such persons are required by the SEC to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 received by it, the
Company believes that all directors, officers and 10% stockholders complied with
such filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board approved the implementation of a plan to compensate each outside director
serving on the Board (the Plan). Under the Plan, all outside directors upon
election to the Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares of common stock of the Company for each year of service as a director.
Such warrants will expire five years after the warrants become vested. The
exercise price of the warrants issued under the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting of the warrants, and the warrants will vest monthly over a one year
period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously elected and serving on the Board at September 3, 1999. In addition,
the Board granted those directors warrants to purchase 20,000 shares of common
stock, at an exercise price of $2.50 per share with the vesting period to
commence on August 1, 1999.
68
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth annual and all other compensation for services
rendered in all capacities to the Company and its subsidiaries during each of
the fiscal years indicated for those persons who, at July 31, 1999, were (i) the
Company's Chief Executive Officer and a former executive officer who acted in a
similar capacity, and (ii) the other three most highly compensated executive
officers (collectively, the "Named Executive Officers"). No other executive
officer received compensation in excess of $100,000 during fiscal 1997, 1998 and
1999. This information includes the dollar values of base salaries, bonus
awards, the number of warrants granted and certain other compensation, if any,
whether paid or deferred. The Company does not grant stock appreciation rights
and has no stock option or other long-term compensation plans for employees.
69
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ---------------------------------
AWARDS PAYOUTS
------------------------ ---------------------
SECURITIES
RESTRICTED UNDER-
AWARD(S) LYING ALL OTHER
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS SATION
- ----------------------------- ---- -------- ----------- ------------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerome B. Richter,(4) (5) 1999 $300,000 $ - $ - $ - - $ - $
President, Chairman of the 1998 299,578 - - - - - -
Board and Chief 1997 138,603 - - - - - -
Executive Officer
Ian T. Bothwell, ,(5) 1999 134,000 - - - - - -
Vice President, Treasurer, 1998 120,000 418,800(1) - - - - -
Assistant Secretary and 1997 90,077 - - - - - -
Chief Financial Officer
Jorge R. Bracamontes, 1999 - - - - - - 155,000(6)
Executive Vice President 1998 - - - - - - 120,000
and Secretary 1997 - - - - - - 526,921(2)
Jerry L. Lockett, (3) (5) 1999 132,000 - - - - - -
Vice President 1998 91,500 - - - - - -
1997 - - - - - - -
<FN>
(1) As a bonus for the year ended July 31, 1997, on September 10, 1997 the
Company granted to Mr. Bothwell warrants to purchase 200,000 shares of
Common Stock for $2.50 per share to expire on September 9, 2000.
(2) Mr. Bracamontes received consulting fees totaling $108,121 for services
performed on behalf of the Company in Mexico. On March 25, 1997, the
Company granted to Mr. Bracamontes warrants to purchase 200,000 shares of
Common Stock for $3.625 per share to expire on March 24, 2000. As an
additional consulting fee for the year ended July 31, 1997, on September
10, 1997, the Company lowered the exercise price of these warrants granted
to Mr. Bracamontes from $3.625 to $2.50.
(3) In connection with Mr. Lockett's employment agreement, Mr. Lockett received
warrants to purchase 50,000 shares of Common Stock for 5.00 per share to
expire on November 16, 2001 and on November 16, 1999, Mr. Lockett will be
entitled to receive warrants to purchase an additional 50,000 shares of
common stock of the Company.
(4) During the year ended July 31, 1998, $77,000 of compensation was offset
against the interest due on Mr. Richter's note receivable.
(5) As a bonus for the year ended July 31, 1999, the Company granted warrants
to purchase 30,000 shares of common stock at an exercise price of $2.50 per
share and an expiration date of July 30, 2004.
(6) Mr. Bracamontes received consulting fees totaling $155,000 for services
performed on behalf of the Company in Mexico. As a bonus for the year ended
July 31, 1999, the Company granted Mr. Bracamontes warrants to purchase
30,000 shares of common stock for $2.50 per share to expire on July 30,
2004.
</TABLE>
70
<PAGE>
AGGREGATED WARRANT EXERCISES IN FISCAL 1999 AND WARRANT VALUES ON JULY 31, 1999
The following table provides certain information with respect to warrants
exercised by the Named Executive Officers during fiscal 1999. The table also
presents information as to the number of warrants outstanding as of July 31,
1999.
<TABLE>
<CAPTION>
Number Of
Securities Value Of
Number of Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Value Warrants Warrants
Upon Realized At July 31, 1999 At July 31, 1999
Exercise of Upon Exercisable/ Exercisable/
Name Warrants Exercise Unexercisable Unexercisable
- -------------------- ----------- --------- ---------------- ------------------
<S> <C> <C> <C> <C>
Jerome B. Richter 0 $ 0 30,000/0 $ (1)
Jorge R. Bracamontes 0 $ 0 230,000/0 $ (1)
Ian T. Bothwell 0 $ 0 230,000/0 $ (1)
Jerry L. Lockett 0 $ 0 80,000/0 $ (1)
<FN>
(1) Based on a closing price of $2.375 per share of Common Stock on July 31,
1999.
</TABLE>
As bonuses to four of its executive officers for the year ended July 31, 1999,
the Company granted each executive warrants to purchase 30,000 shares of common
stock at $2.50 per share through July 30, 2004.
EMPLOYMENT AGREEMENTS
The Company has entered into a six year employment agreement with Mr.
Richter, the President of the Company, through January 31, 2001. Under Mr.
Richter's agreement, he is entitled to receive $300,000 in annual compensation
equal to a monthly salary of $25,000 until earnings exceed a gross profit of
$500,000 per month, whereupon Mr. Richter is entitled to an increase in his
salary to $40,000 per month for the first year of the agreement increasing to
$50,000 per month during the second year of the agreement. Mr. Richter is also
entitled to (i) an annual bonus of 5% of all pre-tax profits of the Company;
(ii) 200,000 stock options for the purchase of 200,000 shares of Common Stock
that can be exercised under certain circumstances at an option price of $7.50
(giving effect to a 2-for-1 stock split on June 10, 1994), and (iii) a term life
insurance policy commensurate with the term of the employment agreement, equal
to six times Mr. Richter's annual salary and three times his annual bonus. Mr.
Richter's employment agreement also entitles him to a right of first refusal to
participate in joint venture opportunities in which the Company may invest,
contains a covenant not to compete until one year from the termination of the
agreement and restrictions on use of confidential information. Through July 31,
1997, Mr. Richter waived his rights to his full salary. Through July 31, 1999,
Mr. Richter has waived his rights to receive the options, bonus on pre-tax
profits and the purchase by the Company of a term life insurance policy. In the
future, Mr. Richter may elect not to waive such rights.
In November 1997, the Company entered into an employment agreement with
Jerry Lockett. Under the terms of the agreement, Mr. Lockett is entitled to
receive $120,000 in annual compensation, plus $1,000 monthly as an automobile
allowance. The Agreement is for two years and may be terminated by the Company
or Mr. Lockett. The agreement also calls for the issuance of warrants for the
purchase of 50,000 shares of common stock of the Company on each of the
anniversary dates of the agreement.
71
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation to executive management is administered by the
Compensation Committee ("Committee") of the Board of Directors. The Committee
is comprised of one outside Director and reports to the Board of Directors on
all compensation matters concerning the Company's executive officers (the
"Executive Officers"). The Executive Officers of the Company are identified in
the Company's July 31, 1999 Form 10-K. In determining annual compensation,
including bonus, and other incentive compensation to be paid to the Executive
Officers, the Committee considers several factors including overall performance
of the Executive Officer (measured in terms of financial performance of the
Company, opportunities provided to the Company, responsibilities, quality of
work and/or tenure with the Company), and considers other factors including
retention and motivation of the Executive Officers and the overall financial
condition of the Company. The Committee provides compensation to the Executive
Officer in the form of cash, equity instruments and forgiveness of interest
incurred on indebtedness to the Company.
The overall compensation provided to the Executive Officers consisting of
base salary and the issuance of equity instruments is intended to be competitive
with the compensation provided to other executives at other companies after
adjusting for factors described above including the Company's financial
condition during the term of employment of the Executive Officer.
BASE SALARY: The base salary is approved based on the Executive
Officer's position, level of responsibility and tenure with the Company.
CHIEF EXECUTIVE OFFICER'S COMPENSATION: During fiscal year 1999, Mr.
Richter was paid in accordance with the terms of his employment agreement which
was entered into in July 13, 1993. During September 1999, Mr. Richter also
received compensation in the form of forgiveness of unpaid interest relating to
his indebtedness to the Company. The Committee determined that Mr. Richter's
compensation under the employment agreement is fair to the Company, especially
considering the position of Mr. Richter with the Company and the financing Mr.
Richter has provided to the Company in the form of personal guarantees on
several of the Company's obligations.
COMPENSATION COMMITTEE
STEWART PAPERIN
72
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative, five-year total stockholder return with the Russell 2000 Index and
the NASDAQ Index. The graph assumes that $100 was invested on August 1, 1994 in
each of the Company's common stock, the Russell 2000 Index and the NASDAQ Index,
and that all dividends were reinvested. The graph is not, nor is it intended it
to be, indicative of future performance of the Company's common stock.
The Company is not aware of a published industry or line of business index
with which to compare the Company's performance. Nor is the Company aware of
any other companies with a line of business and market capitalization similar to
that of the Company with which to construct a peer group index. Therefore, the
Company has elected to compare its performance with the NASDAQ Index and Russell
2000 Index, an index of companies with small capitalization.
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
YEAR ENDED JULY 31,
1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Penn Octane Corporation $ 100 $ 117 $ 278 $ 278 $ 234 $ 139
Russell 2000 $ 100 $ 123 $ 129 $ 170 $ 172 $ 182
NASDAQ $ 100 $ 139 $ 150 $ 221 $ 259 $ 365
</TABLE>
73
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by (i) each stockholder known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each director and (iii) each Named Executive Officer of the Company
as of September 30, 1999
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------------- ----------------------- -----------------
<S> <C> <C>
Jerome B. Richter 3,966,000 (2) 31.10%
CEC, Inc. 1,459,334(3) 11.13%
KFP Grand Ltd. 1,100,000 8.65%
Western Wood Equipment Corporation (Hong
Kong)
20/F Tung Way Commercial Building
Wanchai, Hong Kong 758,163(4) 5.73%
Ian T. Bothwell 248,600(5) 1.92%
Jorge R. Bracamontes 245,500(6) 1.90%
Jerry L. Lockett 106,225(7) (10)
Kenneth G. Oberman 81,500(8) (10)
Stewart J. Paperin 21,500(9) (10)
<FN>
As a group, the current officers and directors of the Company are
beneficial owners of 4,089,325 shares of Common Stock or 32.15% of the voting
power of the Company excluding warrants held by members of such group and
4,669,325 shares of Common Stock or 35.11% of the voting power of the Company
including warrants so held.
(1) The number of shares of Common Stock issued and outstanding on September
30, 1999 was 12,720,497 and all calculations and percentages are based on
such number. The beneficial ownership indicated in the table includes
shares of Common Stock subject to common stock purchase warrants held by
the respective persons as of September 30, 1999, that are exercisable on
the date hereof or within 60 days thereafter. Unless otherwise indicated,
each person has sole voting and sole investment power with respect to the
shares shown as beneficially owned.
(2) Includes 36,000 shares of Common Stock owned by Mrs. Richter and 30,000
shares of Common Stock issuable upon exercise of Common Stock purchase
warrants.
(3) Includes 391,667 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(4) Includes 500,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(5) Includes 230,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(6) Includes 230,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants owned by Mr. Bracamontes and 15,000 shares of
Common Stock owned by Mrs. Bracamontes.
(7) Includes 80,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(8) Includes 5,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(10) Percent of class is less than 1%.
</TABLE>
74
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In September 1997, additional warrants to purchase 130,000 shares of Common
Stock were exercised by a director of the Company at an exercise price of $2.50
per share resulting in a cash payment received by the Company of $325,000.
In October 1997, the Company made payment of $500,000 plus accrued interest
to TRAKO International Limited, a company affiliated with John H. Robinson, a
former director, in full satisfaction of amounts owing under a promissory note
dated March 1, 1996. In August 1997, the Company made payment of $400,000 plus
accrued interest to John H. Robinson, in full satisfaction of amounts owing
under a promissory note dated March 1, 1996.
In October 1997, in connection with the RZB Credit Facility, Mr. Richter
entered into a Guaranty & Agreement pursuant to which Mr. Richter personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Credit Arrangements."
The lease for the Company's executive offices located at 900 Veterans
Boulevard in Redwood City, California is between Mr. Richter, as an individual,
and Nine-C Corporation, as landlord. The Company currently makes monthly
payments directly to Nine-C Corporation in satisfaction of obligations under
such lease.
During April 1997, the Company's President exercised warrants to purchase
2,200,000 shares of common stock of the Company at an exercise price of $1.25
per share. The consideration for the exercise of the warrants included $22,000
in cash and a $2,728,000 promissory note. The note accrues interest at the rate
of 8.25% per annum and is payable annually on April 11 until maturity on April
11, 2000. The payments due on April 11, 1998 and 1999 have not been received.
The promissory note is collateralized by 1,000,000 shares of common stock of the
Company owned by the President and has been recorded as a reduction of
stockholders' equity. In connection with the Company's lease agreements (the
Lease Agreements) with CPSC (see note O), the President agreed to provide
500,000 shares of common stock of the Company owned by the President (the
Collateral) to replace the requirement of the Company to provide a letter of
credit to CPSC as specified under the Lease Agreement. During September 1999,
in consideration for providing the Collateral, the Board of Directors of the
Company agreed to offset the interest due on the President's $2,728,000
promissory note.
On July 31, 1998, interest receivable from the President has been offset by
the remaining amount due to the President as of July 31, 1998 under his
employment agreement. The remaining balance of the interest receivable has been
reserved.
On July 31, 1999, interest receivable from the President has been
reserved.
As of July 31, 1997, the Company had a receivable from a corporation owned
by an officer of the Company in the amount of $171,601 of which approximately
$130,000 was repaid in September 1997 (see note F for other related party
transactions). During the year ended July 31, 1998 and 1999, the Company paid
that corporation $181,000 and $125,000 for Mexico related expenses incurred by
that corporation on the Company's behalf. In addition, the Company has also
incurred costs associated with the LPG Expansion Program on behalf of that
corporation (see note O).
During May 1999, the Company and PennWilson completed the sale of assets
related to the CNG business to a company controlled by a director and officer of
the Company for $1,200,000 (see note E). The selling price of the assets was
based on the book values of the assets which, as of the date of closing,
approximated the fair value of the assets sold.
75
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Financial Statements and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Penn Octane Corporation
Independent Auditor's Report
Consolidated Balance Sheet as of July 31, 1998 and 1999
Consolidated Statements of Operations for the years ended
July 31, 1997, 1998 and 1999
Consolidated Statement of Stockholders' Equity for the years
ended July 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended
July 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
b. Reports on Form 8-K.
The following Reports on Form 8-K are incorporated herein by reference:
Company's Current Report on Form 8-K filed on February 9, 1999
regarding the Company's realization of the IBC-Brownsville award.
Company's Current Report on Form 8-K filed on March 4, 1999
regarding the Company's exchange of $.9 million of indebtedness
for Senior Preferred Stock of the Company.
Company's Current Report on Form 8-K filed on June 1, 1999
regarding the Company's sale of the CNG assets.
c. Exhibits.
The following Exhibits are incorporated herein by reference:
Exhibit No.
- ------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
3.2 Amended and Restated By-Laws of the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
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10.1 Employment Agreement dated July 12, 1993 between the Registrant and Jerome
B. Richter. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1993 filed on March
7, 1994, SEC File No. 000-24394).
10.2 Security Agreement dated July 1, 1994 between International Bank of
Commerce and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October 31,
1993 filed on March 7, 1994, SEC File No. 000-24394).
10.3 Security Agreement dated December 6, 1995 between Bay Area Bank and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.4 Purchase Agreement dated February 22, 1996 between Eagle Oil Company and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.5 Judgment from litigation with International Bank of Commerce - Brownsville
dated February 28, 1996. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the annual period ended July 31, 1996 filed on
November 13, 1996, SEC File No. 000-24394).
10.6 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated March 1, 1996 between John H. Robinson and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.7 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated as of April 30, 1996 between TRAKO
International Company LTD and Registrant. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the annual period ended July 31,
1996 filed on November 13, 1996, SEC File No. 000-24394).
10.8 Extension of June 16, 1996 Payout Agreement between Penn Octane Corporation
and Lauren Constructors, Inc., and Tom Janik and Associates, Inc.
dated October 10, 1996 (Including June 16, 1995 Payout Agreement).
(Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the annual period ended July 31, 1996 filed on November 13, 1996, SEC
File No. 000-24394).
10.9 LPG Purchase Agreement dated October 1, 1996 between Exxon Company U.S.A.
and Registrant. (Incorporated by reference to the Company's Annual Report
on Form 10-KSB for the annual period ended July 31, 1996 filed on November
13, 1996, SEC File No. 000-24394).
10.10Promissory Note, Letter of Credit and Security Agreement dated October 3,
1996 between Bay Area Bank and Registrant. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB for the annual period ended July
31, 1996 filed on November 13, 1996, SEC File No. 000-24394).
10.11Promissory Note dated October 7, 1996 between Jerry Williams and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.12Promissory Note dated October 9, 1996 between Richard Serbin and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.13LPG Sales Agreement dated October 10, 1996 between P.M.I. Trading Ltd. and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.14Promissory Note dated October 29, 1996 between James Mulholland and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
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10.15Promissory Note between Frederick Kassner and Registrant dated October 29,
1996. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended October 31, 1996 filed on December
16, 1996, SEC File No. 000-24394).
10.16Agreement between Roberto Keoseyan and the Registrant dated November 12,
1996. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended January 31, 1997 filed on March 17,
1997, SEC File No. 000-24394).
10.17Promissory Note between Bay Area Bank and the Registrant dated December
20, 1996. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended January 31, 1997 filed on March
17, 1997, SEC File No. 000-24394).
10.18Agreement for Exchange of Warrants for Common Stock dated February 5, 1997
between the Registrant and Mark D. Casaday. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1997 filed on March 17, 1997, SEC File No. 000-24394).
10.19Agreement for Exchange of Warrants for Common Stock dated February 5, 1997
between the Registrant Thomas P. Muse. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended
January 31, 1997 filed on March 17, 1997, SEC File No. 000-24394).96, SEC
File No. 000-24394).
10.20Agreement for Exchange of Warrants for Common Stock dated February 19,
1997 between the Registrant and Thomas A. Serleth. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC File
No. 000-24394).
10.21Interim Operating Agreement between Wilson Acquisition Corporation and
Wilson Technologies Incorporated dated March 7, 1997. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC File
No. 000-24394).
10.22Purchase Agreement dated March 7, 1997 between the Registrant, Wilson
Acquisition Corporation, Wilson Technologies Incorporated and Zimmerman
Holdings Inc. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended January 31, 1997 filed on
March 17, 1997, SEC File No. 000-24394).
10.23Amendment of the Interim Operating Agreement dated March 21, 1997 between
the Registrant, Wilson Acquisition Corporation, Wilson Technologies
Incorporated and Zimmerman Holdings Inc. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended
April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.24Promissory Note and Pledge and Security Agreement dated March 26, 1997
between M.I. Garcia Cuesta and the Registrant. (Incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.25Real Estate Lien Note, Deed of Trust and Security Agreement dated April 9,
1997 between Lauren Constructors, Inc. and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
10.26Promissory Note and Pledge and Security Agreement dated April 11, 1997
between Jerome B. Richter and the Registrant. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
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10.27Lease dated October 20, 1993 between Brownsville Navigation District of
Cameron County, Texas and Registrant with respect to the Company's land
lease rights, including related amendment to the Lease dated as of February
11, 1994 and Purchase Agreement. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed for the quarterly period
ended April 30, 1994 on February 25, 1994, SEC File No. 000-24394).
10.28Lease Amendment dated May 7, 1997 between Registrant and Brownsville
Navigation District of Cameron County, Texas. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.29Lease dated May 22, 1997 between Nine-C Corporation and J.B. Richter,
Capital resources and J.B. Richter and J.B. Richter, an individual, as
amended with respect to the Company's executive offices. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
10.30Promissory Note dated May 28, 1997 between Bay Area Bank and the
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16,
1997, SEC File No. 000-24394).
10.31Lease dated September 1, 1993 between Seadrift Pipeline Corporation and
Registrant with respect to the Company's pipeline rights. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended October 31, 1993 filed on March 7, 1994, SEC File
No. 000-24394).
10.32Lease Amendment dated May 21, 1997 between Seadrift Pipeline Corporation
and the Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed
on June 16, 1997, SEC File No. 000-24394).
10.33Irrevocable Standby Letter of Credit No. 310 dated April 2, 1997 between
Bay Area Bank and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.34Commercial Guaranty dated April 2, 1997 between Bay Area Bank and Jerome
B. Richter. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.35Commercial Pledge and Security Agreement dated April 2, 1997 between Bay
Area Bank and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.36Promissory Note dated April 2, 1997 between Bay Area Bank and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.37Amendment to Irrevocable Standby Letter of Credit No. 310 dated September
15, 1997. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.38Warrant Purchase Agreement, Promissory Note and Common Stock Warrant dated
June 15, 1997 between Western Wood Equipment Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.39Security Agreement, Common Stock Warrant and Promissory Note dated June
15, 1997 between Western Wood Equipment Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
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10.40Performance Bond dated June 25, 1997 between PennWilson CNG and Amwest
Surety Insurance Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.41Labor and Material Payment Bond dated June 11, 1997 between PennWilson CNG
and Amwest Surety Insurance Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.42Subcontract Agreement dated June 25, 1997 between A.E. Schmidt
Environmental and PennWilson CNG. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.43Propylene Purchase Agreement dated July 31, 1997 between Union Carbide and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.44Release of Lien dated August 1997 by Lauren Constructors, Inc.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.45LPG Purchase Agreement dated August 28, 1997 between PMI Trading Company
Ltd and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.46Continuing Agreement for Private Letters of Credit dated October 14, 1997
between RZB Finance LLC and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.47Promissory Note dated October 14, 1997 between RZB Finance LLC and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.48General Security Agreement dated October 14, 1997 between RZB Finance LLC
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.49Guaranty and Agreement dated October 14, 1997 between RZB Finance LLC and
Jerome Richter. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.50Purchase Agreement dated October 21, 1997 among Castle Energy Corporation,
Clint Norton, Southwest Concept, Inc., James F. Meara, Jr., Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara
IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.51Registration Rights Agreement dated October 21, 1997 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.52Promissory Note dated October 21, 1997 between Castle Energy Corporation
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
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10.53Common Stock Purchase Warrant dated October 21, 1997 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.54Promissory Note dated October 21, 1997 between Clint Norton and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.55Common Stock Purchase Warrant dated October 21, 1997 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.56Promissory Note dated October 21, 1997 between Southwest Concept, Inc. and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.57Common Stock Purchase Warrant dated October 21, 1997 issued to Southwest
Concept, Inc. by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.58Promissory Noted dated October 21, 1997 between James F. Meara, Jr. and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.59Common Stock Purchase Warrant dated October 21, 1997 issued to James F.
Meara, Jr. by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.60Promissory Note dated October 21, 1997 between Donaldson Lufkin Jenrette
Securities Corporation Custodian SEP FBO James F. Meara IRA and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.61Common Stock Purchase Warrant dated October 21, 1997 issued to Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.62Promissory Note dated October 21, 1997 between Lincoln Trust Company FBO
Perry D. Snavely IRA and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.63Common Stock Purchase Warrant dated October 21, 1997 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.64Agreement dated November 7, 1997 between Ernesto Rubio del Cueto and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.65LPG Sales Agreement dated November 12, 1997 between Exxon and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.66Purchase order dated November 7, 1996 between County Sanitation Districts
of Orange County and Wilson Technologies, Inc. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the three months ended
October 31, 1997 filed on December 15, 1997, SEC File No. 000-24394)
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10.67Amendment letter dated April 22, 1998 between RZB Finance LLC and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended April 30, 1998 filed on June 15, 1998,
SEC File No. 000-24394)
10.68Lease dated May 8, 1998 between Nine-C Corporation and J.B. Richter,
Capital Resources and J.B. Richter and J.B. Richter, an individual, with
respect to the Company's executive offices. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the three months ended
April 30, 1998 filed on June 15, 1998, SEC File No. 000-24394)
10.69Employment Agreement dated October 20, 1997 between the Company and
Vicente Soriano. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the three months ended April 30, 1998 filed on June
15, 1998, SEC File No. 000-24394)
10.70Employment Agreement dated November 17, 1997 between the Company and Jerry
L. Lockett. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended April 30, 1998 filed on June 15, 1998,
SEC File No. 000-24394)
10.71LPG 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).
10.72LPG Sales Agreement dated November 16, 1998 between Exxon and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.73Rollover and Assignment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.74Registration Rights Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.75Collateral Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.76Assignment of Judgment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.77Amended Promissory Note dated December 1, 1998 between Castle Energy
Corporation and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.78Common Stock Purchase Warrant dated December 1, 1998 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
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10.79Amended Promissory Note dated December 1, 1998 between Clint Norton and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998 filed on
December 18, 1998, SEC File No. 000-24394).
10.80Common Stock Purchase Warrant dated December 1, 1998 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.81Amended Promissory Note dated December 1, 1998 between Southwest Concept,
Inc. and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.82Common Stock Purchase Warrant dated December 1, 1998 issued to Southwest
Concept, Inc. by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.83Amended Promissory Note dated December 1, 1998 between James F. Meara, Jr.
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.84Common Stock Purchase Warrant dated December 1, 1998 issued to James F.
Meara, Jr. by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.85Amended Promissory Note dated December 1, 1998 between Donaldson Luftkin
Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998 filed on
December 18, 1998, SEC File No. 000-24394).
10.86Common Stock Purchase Warrant dated December 1, 1998 issued to Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.87Amended Promissory Note dated December 1, 1998 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
10.88Common Stock Purchase Warrant dated December 1, 1998 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
10.89Purchase Agreement dated November 13, 1998 between Van Moer Santerre &
Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.90Registration Rights Agreement dated November 13, 1998 between Van Moer
Santerre & Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.91Common Stock Purchase Warrant dated November 13, 1998 issued to Van Moer
Santerre & Company by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.92Purchase Agreement dated December 14, 1998 between KFP Grand LTD. and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
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10.93Registration Rights Agreement dated December 14, 1998 between KFP Grand
LTD. and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.94Common Stock Purchase Warrant dated December 14, 1998 issued to KFP Grand
LTD. by the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.95Second Amendment of the Interim Operating Agreement dated December 15,
1998 among Wilson Technologies Inc., Zimmerman Holdings, Inc. and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.96Purchase Agreement dated March 18, 1999 between Van Moer Santerre &
Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1999
filed on June 14, 1999, SEC File No. 000-24394).
10.97Registration Rights Agreement dated March 18, 1999 between Van Moer
Santerre & Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.98Common Stock Purchase Warrant dated March 18, 1999 issued to Van Moer
Santerre & Company by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.99Purchase Agreement dated March 19, 1999 between Steve Payne and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 1999 filed on June 14,
1999, SEC File No. 000-24394).
10.100 Registration Rights Agreement dated March 19, 1999 between Steve Payne
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.101 Common Stock Purchase Warrant dated March 19, 1999 issued to Steve Payne
by the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.102 Purchase Agreement dated March 19,1999 between Igor Kent and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended April 30, 1999 filed on June 14, 1999, SEC
File No. 000-24394).
10.103 Registration Rights Agreement dated March 19, 1999 between Igor Kent and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on June
14, 1999, SEC File No. 000-24394).
10.104 Common Stock Purchase Warrant dated March 19, 1999 issued to Igor Kent by
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on June
14, 1999, SEC File No. 000-24394).
The following Exhibits are filed as part of this report:
3.3 The Company's Certificate of the Designation, Powers, Preferences and
Rights of the Series B. Class A Senior Cumulative Preferred Stock, filed
with the State of Delaware.
10.105 Purchase Agreement dated July 15, 1999 between Steve Payne and the
Company.
10.106 Registration Rights Agreement dated July 15, 1999 between Steve Payne and
the Company.
10.107 Common Stock Purchase Warrant dated July 15, 1999 issued to Steve Payne
by the Company.
84
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10.108 Purchase Agreement dated July 16, 1999 between The Apogee Fund L.P. and
the Company.
10.109 Registration Rights Agreement dated July 16, 1999 between The Apogee Fund
L.P. and the Company.
10.110 Common Stock Purchase Warrant dated July 16, 1999 issued to The Apogee
Fund L.P. by the Company.
10.111 Purchase Agreement dated July 21, 1999 between Igor Kent and the Company.
10.112 Registration Rights Agreement dated July 21, 1999 between Igor Kent and
the Company.
10.113 Common Stock Purchase Warrant dated July 21, 1999 issued to Igor Kent by
the Company.
10.114 Purchase Agreement dated July 29, 1999 between Southwest Concept Inc. and
the Company.
10.115 Registration Rights Agreement dated July 29, 1999 between Southwest
Concept Inc. and the Company.
10.116 Common Stock Purchase Warrant dated July 29, 1999 issued to Southwest
Concept Inc. by the Company.
10.117 Purchase Agreement dated July 29, 1999 between Clint Norton and the
Company.
10.118 Registration Rights Agreement dated July 29, 1999 between Clint Norton
and the Company.
10.119 Common Stock Purchase Warrant dated July 29, 1999 issued to Clint Norton
by the Company.
10.120 Purchase Agreement dated July 30, 1999 between Europa International, Inc.
and the Company.
10.121 Registration Rights Agreement dated July 30, 1999 between Europa
International, Inc. and the Company.
10.122 Common Stock Purchase Warrant dated July 30, 1999 issued to Europa
International, Inc. by the Company.
10.123 Purchase Agreement dated July 30, 1999 between Valor Capital Management
L.P and the Company.
10.124 Registration Rights Agreement dated July 30, 1999 between Valor Capital
Management L.P and the Company.
10.125 Common Stock Purchase Warrant dated July 30, 1999 issued to Valor Capital
Management L.P by the Company.
10.126 Purchase Agreement dated July 30, 1999 between Lincoln Trust Company FBO
Perry D. Snavely IRA and the Company.
10.127 Registration Rights Agreement dated July 30, 1999 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company.
10.128 Common Stock Purchase Warrant dated July 30, 1999 issued to Lincoln Trust
Company FBO Perry D. Snavely IRA by the Company.
10.129 Common Stock Purchase Warrant dated July 30, 1999 issued to Sterling 2000
Investments by the Company.
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<PAGE>
10.130 Lease/Installment Purchase Agreement dated November 24, 1998 by and
between CPSC International and the Company.
10.131 Amendment No. 1, to the Lease/Installment Purchase Agreement dated
November 24, 1999, dated January 7, 1999 by and between CPSC International
and the Company.
10.132 Amendment, to Lease/Installment Purchase Agreement dated February 16,
1999 dated January 25, 1999 by and between CPSC International and the
Company.
10.133 Lease/Installment Purchase Agreement dated February 16, 1999 by and
between CPSC International and the Company.
10.134 Amendment No. 2, to Lease/Installment Purchase Agreement dated November
24, 1998 and to Lease/Installment Purchase Agreement dated January 7, 1999
dated September 16, 1999 by and between CPSC International and the Company.
10.135 Agreement dated September 16, 1999 by and between CPSC International and
the Company.
10.136 Purchase, Sale and Service Agreement for Propane/Butane Mix entered into
effective as of October 1, 1999 by and between Exxon Company, U.S.A. and
the Company.
10.137 Sales/Purchase Agreement of Propane Stream dated October 1, 1999 between
PG&E NGL Marketing, L.P. and the Company.
10.138 Permit issued on July 26, 1999 by the United States Department of State
authorizing the Company to construct two pipelines crossing the
international boundary line between the United States and Mexico for the
transport of liquefied petroleum gas (LPG) and refined product (motor
gasoline and diesel fuel).
10.139 Amendment to the LPG Purchase Agreement dated June 18, 1999 between PMI
Trading Company Ltd. And the Company.
21.1 Subsidiaries of the Registrant (filed herewith)
27.1 Financial Data Schedule. (Filed herewith.)
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
By:/s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
November 9, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ------------------------------- ----------------
/s/Jerome B. Richter Jerome B. Richter November 9, 1999
- ----------------------- Chairman, President and Chief
Executive Officer
/s/Jorge R. Bracamontes Jorge R. Bracamontes November 9, 1999
- ----------------------- Executive Vice President,
Secretary and Director
Secretary and Director
/s/Ian T. Bothwell Ian T. Bothwell November 9, 1999
- ----------------------- Vice President, Treasurer,
Assistant Secretary, Chief
Financial Officer, Principal
Accounting Officer and Director
/s/Jerry L. Lockett Jerry L. Lockett November 9, 1999
- ----------------------- Vice President and Director
/s/Kenneth G. Oberman Kenneth G. Oberman November 9, 1999
- ----------------------- Director
/s/Stewart J. Paperin Stewart J. Paperin November 9, 1999
- ----------------------- Director
87
<PAGE>
PENN OCTANE CORPORATION
CERTIFICATE OF THE DESIGNATION, POWERS,
PREFERENCES AND RIGHTS OF THE SERIES B CONVERTIBLE REDEEMABLE
PREFERRED STOCK
PAR VALUE $.01 PER SHARE
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
We, Jerome B. Richter, Chairman and Chief Executive Officer, and Jorge R.
Bracamontes, Secretary, of Penn Octane Corporation (the "Corporation), a
corporation organized and existing under the General Corporation Law of the
state of Delaware, in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation by the Restated Certificate of Incorporation, as amended, of the,
Corporation, on March 5,1999, the Board of Directors adopted the following
resolution creating a series of 125,000 shares of Preferred Stock designated as
"SERIES B Convertible Redeemable Preferred Stock":
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Corporation by the provisions of its Restated
Certificate of Incorporation, as amended, the Board of Directors does hereby
establish and designate and provide, for the issuance of a series of the
Preferred Stock of the Corporation designated as "SERIES B Convertible
Redeemable Preferred Stock," which shall consist of 125,000 shares, and the
Board of Directors does hereby fix the terms, voting powers, preferences and
relative rights, participating, optional and other special rights of the shares
of such series, and the qualifications, limitations and restrictions thereof, to
be as follows:
(1) Designation and Number of Shares. The designation of said series
----------------------------------
of Preferred Stock, par value $.01 per share, authorized by this resolution
shall be "SERIES B Convertible Redeemable Preferred Stock" (the "SERIES B
Convertible Preferred Stock"). The number of shares of SERIES B Convertible
Preferred Stock authorized hereby shall be 125,000.
(2) Rank. The SERIES B Convertible Preferred Stock shall, with respect
----
to dividend rights and rights on liquidation, winding up and dissolution, rank
prior to any other equity securities of the Corporation, whether currently
authorized or hereafter created, including any other series of Preferred Stock
and the Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock") (all of such equity securities of the Corporation to which the SERIES B
Convertible Preferred Stock ranks prior, including any other series of Preferred
Stock and the Common Stock, are referred to herein collectively as the "Junior
Securities").
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<PAGE>
(3) Dividends.
---------
(a) The holders of the shares of SERIES B Convertible Preferred Stock shall
be entitled to receive, before any dividend shall be paid or declared upon or
set aside for any Junior Securities, when and as declared by the Board of
Directors, out of funds legally available for the payment of dividends,
dividends at the annual rate of $1.00 per share in equal semi-annual payments on
October 31 and April 30 of each year (each of such dates being a "Dividend
Payment Date"), commencing with October 31, 1999. Such dividends shall be paid
to the holders of record as of the close of business on the date which is ten
(10) business days prior to the Dividend Payment Date. Dividends on the SERIES
B Convertible Preferred Stock shall be cumulative (whether or not there shall be
net profits or net assets of the Corporation legally available for the payment
of such dividend). Dividends on the SERIES B Convertible Preferred Stock shall
be payable at the option of the Corporation in cash or in shares of SERIES B
Convertible Preferred Stock at the rate of one full share of SERIES B
Convertible Preferred Stock for each $10.00 of dividends, or any combination
thereof.
(b) All dividends paid with respect to shares of SERIES B Convertible
Preferred Stock pursuant to paragraph (3)(a) hereof shall be paid pro rata per
share.
(c) (i) Whenever dividends or distributions payable on the SERIES B
Convertible Preferred Stock as provided in this Section 3 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of SERIES B Convertible Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(a) declare or pay dividends, or make any other distributions, on any
Junior Securities (either as to dividends or upon liquidation, dissolution or
winding up); or
(b) redeem or purchase or otherwise acquire for consideration shares of
any Junior Securities (either as to dividends or upon liquidation, dissolution
or winding up), provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such Junior Securities in exchange for shares
of any other Junior Securities.
(ii) Subject to the foregoing provisions of this Section 3, the Board
of Directors may declare, and the Corporation may pay or set apart for payment,
dividends and other distributions on any of the Junior Securities, and may
purchase or otherwise redeem any of the Junior Securities or any warrants,
rights or options exercisable for or convertible into any of the Junior
Securities, and the holders of the shares of SERIES B Convertible Preferred
Stock shall not be entitled to share therein.
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(4) Liquidation Preference.
-----------------------
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, the holders of shares of SERIES
B Convertible Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its stockholders,
either from capital, surplus or earnings an amount in cash equal to $10.00 for
each share outstanding, plus an amount in cash equal to all accrued but unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding up,
before any payment shall be made or any assets distributed to the holders of any
of the Junior Securities. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation available for distribution to
the holders of the SERIES B Convertible Preferred Stock shall be insufficient to
pay the holders of the SERIES B Convertible Preferred Stock the full amounts to
which they respectively shall be entitled pursuant to this Section 4(a), the
holders of shares of the SERIES B Convertible Preferred Stock shall share
ratably in any distribution of assets according to the respective amounts that
would be payable in respect of the shares of SERIES B Convertible Preferred
Stock held by them upon such distribution if all amounts payable on or with
respect to said shares were paid in full.
(b) The liquidation payment with respect to each fractional share of
SERIES B Convertible Preferred Stock outstanding or accrued but unpaid shall be
equal to a ratably proportionate amount of the liquidation payment with respect
to each outstanding share of SERIES B Convertible Preferred Stock.
(c) For the purposes of this Section 4, neither the voluntary sale,
conveyance, lease, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all the property or assets of
the Corporation or the consolidation or merger of the Corporation with one or
more other corporations shall be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, unless such voluntary sale, conveyance,
lease, exchange or transfer shall be in connection with a dissolution or winding
up of the business of the Corporation.
(5) Redemption.
----------
(a) The Corporation, at its sole option, upon providing written notice
(the "Notice") pursuant to Section 5(f) hereof, to the holders of the SERIES B
Convertible Preferred Stock, may redeem, to the extent funds are legally
available therefor, the SERIES B Convertible Preferred Stock, at any time in
whole or from time to time in part (the "Redeemed Shares"), at the per share
redemption price equal to $10.00 plus all accrued and unpaid dividends thereon
to the date fixed for redemption, without interest (the "Redemption Price"). If
less than all outstanding shares of SERIES B Convertible Preferred Stock then
outstanding are redeemed, the Corporation shall redeem a like percentage of the
shares of SERIES B Convertible Preferred Stock held by each holder thereof.
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<PAGE>
(b) In the event that any of the holders of the SERIES B Convertible
Preferred Stock upon receipt of the Notice, elect to convert any of the Redeemed
Shares as provided under Section 6 prior to the expiration of the five days
after a Notice is given, in whole or in part, then the number of Redeemed Shares
shall be reduced by the number of shares of SERIES B Convertible Preferred Stock
as to which a holder has duly exercised its conversion rights. In addition, in
the event that any of the holders of the SERIES B Convertible Preferred Stock
elect to convert the SERIES B Convertible Preferred Stock, in whole or in part,
as provided in this Section 5, then the Corporation is not obligated to redeem
any Redeemed Shares.
(c) In the event the Corporation has provided the Notice to the holders
of the Redeemed Shares, and the holders of the Redeemed Shares do not elect to
convert any of the Redeemed Shares, then the Corporation shall be required to
pay the holders of the Redeemed Shares the Redemption Price for each Redeemed
Share within five (5) business days from the expiration of the Notice Period
(the "Due Date"). In the event the Corporation fails to pay the Redemption
Price in full, then on each monthly anniversary of the Due Date for so long as
any portion of the Redemption Price remains unpaid, the Corporation shall issue
to the holder of each Redeemed Share, .555 shares of Common Stock of the
Corporation. Any partial segments of the Redemption Price shall be allocated
pro rata among all of the Redeemed Shares. Fractional share amounts shall be
rounded up.
(d) Shares of SERIES B Convertible Preferred Stock which have been
issued and reacquired in any manner, including shares purchased, redeemed,
exchanged, or converted, shall (upon compliance with any applicable provisions
of the laws of the State of Delaware) be retired and canceled promptly after the
acquisition thereof and shall thereafter have the status of authorized and
unissued shares of Preferred Stock, undesignated as to class or series, and may
be redesignated and reissued as part of any class or series of the Preferred
Stock, par value $.01 per share, of the Corporation; provided, however, that no
such issued and reacquired shares of SERIES B Convertible Preferred Stock shall
be reissued or sold as SERIES B Convertible Preferred Stock.
(e) Notwithstanding the foregoing provisions of this Section 5, unless
the full cumulative dividends on all outstanding shares of SERIES B Convertible
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of SERIES B Convertible
Preferred Stock shall be redeemed unless all outstanding shares of SERIES B
Convertible Preferred Stock are simultaneously redeemed, and the Corporation
shall not purchase or otherwise acquire any shares of SERIES B Convertible
Preferred Stock;
(f) (i) In the event the Corporation shall elect to redeem shares of
SERIES B Convertible Preferred Stock, Notice of such redemption shall be given
by certified mail, return receipt required, postage prepaid, mailed so that it
is received not less than five (5) days nor more than thirty (30) days prior to
the date of redemption (the "Redemption Date"), to each holder of record of the
shares to be redeemed at such holder's address as the same appears on the stock
register of the Corporation; provided, however, that no failure to mail such
Notice nor any defect therein shall affect the validity of the proceeding for
the redemption of any shares of SERIES B Convertible Preferred Stock to be
redeemed except as to the holder to whom the Corporation has failed to mail said
Notice or except as to the holder whose Notice was defective. For purposes of
this Section 5, Notice shall be deemed given when received by a holder of SERIES
B Convertible Preferred Stock. Each such Notice shall state: (A) the Redemption
Date; (B) the number of shares of SERIES B Convertible Preferred Stock to be
redeemed and, if less than all the shares held by such holder are to be redeemed
from such holder, the number of shares to be redeemed from such holder; (C) the
Redemption Price; (D) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; and (E) that dividends on
the shares to be redeemed will cease to accrue on such Redemption Date.
- 4 -
<PAGE>
(ii) Provided that the Notice has been given as aforesaid, from and
after the Redemption Date dividends on the Redeemed Shares shall cease to
accrue, and said Redeemed Shares shall no longer be deemed to be outstanding and
shall have the status of authorized but unissued shares of Preferred Stock,
unclassified as to class or series, and shall not be reissued as shares of
SERIES B Convertible Preferred Stock, and all rights of the holders thereof as
stockholders of the Corporation with respect to said Redeemed Shares (except the
right to receive from the Corporation the Redemption Price) shall cease. Upon
surrender in accordance with said Notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
of the Corporation shall so require and the Notice shall so state), such
Redeemed Shares shall be redeemed by the Corporation at the Redemption Price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(6) Conversion.
----------
(a) Each holder of shares of the SERIES B Convertible Preferred Stock
shall have the right, at such holder's option, at any time or from time to time,
to convert all or any of such shares of SERIES B Convertible Preferred Stock
into such number of fully paid and nonassessable shares of the Corporation's
Common Stock as $10.00 multiplied by the number of shares of the SERIES B
Convertible Preferred Stock being converted is a multiple of the Conversion
Price (as hereinafter defined and as last adjusted pursuant to this Section 6
and then in effect) for the shares of the SERIES B Convertible Preferred Stock
being converted, by surrender of the certificate or certificates representing
the shares of the SERIES B Convertible Preferred Stock so to be converted in the
manner provided in this Section 6(a). The "Conversion Price' per share at which
shares of Common Stock shall I be issuable upon conversion of shares of the
SERIES B Convertible Preferred Stock shall initially be $2.00; provided however
, that such Conversion Price shall be subject to adjustment as set forth in
Section 6(c) hereof.
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<PAGE>
The holder of any shares of the SERIES B Convertible Preferred Stock may
exercise the conversion right provided in this Section (6)(a) by delivering to
the Corporation during regular business hours, at the Corporation's principal
office (or at such other place as may be designated by the Corporation), the
certificate or certificates representing the shares to be converted, duly
endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued.
Conversion under this Section 6(a) shall be deemed to have been effected on
the date when such delivery is made, and such date is referred to herein as the
"Conversion Date." As promptly as practicable after the Conversion Date, the
Corporation shall issue and deliver to or upon the written order of such holder,
at such office or to the place designated by the Corporation, a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled and a check or cash in respect of any fractional interest in a share
of Common Stock as provided in Section 6(b) hereof. The person in whose name
the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a holder of record of such Common Stock on the applicable
Conversion Date unless the transfer books of the Corporation are closed on that
date, in which event the person shall be deemed to have become a holder of
record on the next succeeding date on which the transfer books are open, but the
Conversion Price shall be that in effect on the Conversion Date. Upon conversion
of only a portion of the number of shares covered by a certificate representing
shares of SERIES B Convertible Preferred Stock surrendered for conversion, the
Corporation shall issue and deliver to or upon the written order of the holder
of the certificate so surrendered for conversion, at the expense of the
Corporation, a new certificate covering the number of shares of SERIES B
Convertible Preferred Stock representing the unconverted portion of the
certificate so surrendered, which new certificate shall entitle the holder
thereof to dividends on the shares of SERIES B Convertible Preferred Stock
represented thereby to the same extent as if the certificate theretofore
representing such unconverted shares had not been surrendered for conversion.
(b) No fractional shares of Common Stock or scrip shall be issued upon
conversion of shares of the SERIES B Convertible Preferred Stock. If more than
one share of SERIES B Convertible Preferred Stock shall be surrendered for
conversion at any one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares of SERIES B Convertible Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of SERIES B Convertible
Preferred Stock, the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined in Section 6(c)(vi) hereof) of a share of Common Stock multiplied by
such fractional interest. Fractional interests shall not be entitled to
dividends. and the holders thereof shall not be entitled to any rights as
stockholders of the Corporation in respect of such fractional interests
(c) The Conversion Price shall be subject to adjustment from time to
time as follows:
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(i) If the number of shares of Common Stock outstanding at any time
after March 3, 1999 (the "Base Date") is increased by a stock dividend payable
in shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then immediately following the record date fixed for the determination of
holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of each share of SERIES
B Convertible Preferred Stock shall be increased in proportion to such increase
in outstanding shares of Common Stock.
(ii) If the number of shares of Common Stock outstanding at any time
after the Base Date is decreased by a combination of the outstanding shares of
Common Stock, then, immediately following the record date for such combination,
the Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of SERIES B
Convertible Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares of Common Stock.
(iii) If the Corporation shall declare a cash dividend upon its Common
Stock (and not on SERIES B Convertible Preferred Stock) payable otherwise than
out of earnings or earned surplus or shall distribute to holders of its Common
Stock shares of its capital stock (other than Common Stock), stock or other
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends and distributions) or options
or rights (excluding options to purchase and rights to subscribe for Common
Stock or other securities of the Corporation convertible into or exchangeable
for Common Stock),then, in each such case, immediately following the record date
fixed for the determination of the holders of Common Stock entitled to receive
such dividend or distribution, the Conversion Price in effect thereafter shall
be adjusted by multiplying the Conversion Price in effect immediately prior to
such record date by a fraction of which the numerator shall be an amount equal
to the remainder of (x) the Current Market Price of one share of Common Stock
less (y) the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive) of the stock, securities, evidences of
indebtedness, assets, options or rights so distributed in respect of one share
of Common Stock, and of which the denominator shall be such Current Market
Price. Such adjustment shall be made on the date such dividend or distribution
is made and shall become effective at the opening of business on the business
day next following the record date for the determination of stockholders
entitled to such dividend or distribution.
(iv) If, at any time after the Base Date, any capital reorganization or
reclassification of the stock of the Corporation (other than a change in par
value or from par value to no par value or from no par value to par value or as
a result of a stock dividend or subdivision, split-up or combination of shares),
or the consolidation or merger of the Corporation with or into another person
(other than a consolidation or merger in which the Corporation is the continuing
corporation and which does not result in any change in the Common Stock) or the
sale or other disposition of all or substantially all the properties and assets
of the Corporation as an entirety to any other person takes place, each share of
the SERIES B Convertible Preferred Stock shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other securities or
property of the Corporation or of the corporation resulting from such
consolidation or surviving such merger or to which such properties and assets
shall have been sold or otherwise disposed to which the holder of the number of
shares of Common Stock deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation, merger, sale or other
disposition) upon conversion of such shares would have been entitled upon such
reorganization reclassification, consolidation, merger, sale or other
disposition. The provisions of this clause (iv) shall similarly apply to
successive reorganizations, reclassifications consolidations, mergers, sales and
other dispositions.
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<PAGE>
(v) All calculations under this Section 6(c) shall be made to the
nearest cent or to the nearest one-tenth of a share, as the case may be.
(vi) For the purpose of any computation pursuant to this Section 6(c)
or Section 6(b), the "Current Market Price" at any date of one share of Common
Stock shall be deemed to be the average of the daily closing prices for the ten
(10) consecutive business days ending on the last business day before the day in
question (as adjusted for any stock dividend, split, combination or
reclassification that took effect during such ten (10) business day period), or,
in case no sales took place on the day in question, the mean of the last bid and
asked prices on such day, in either case on the principal national securities
exchange on which the Common Stock is then listed or admitted to trading or on
the NASDAQ Stock Market (or, if the Common Stock is not listed or admitted for
trading on any such exchange or on the NASDAQ Stock Market on any day in
question, then such price as shall be deemed to be the mean of the last reported
bid and asked prices on such day as reported by the NASD Bulletin Board or, if
not so quoted thereon, by the National Quotation Bureau, Inc. (or any similar
reputable quotation and reporting service if such quotation is not reported by
the National Quotation Bureau, Inc.); provided however, that if the Common Stock
----------------
is not traded in such manner that the quotations referred to in this clause (vi)
are available for the period required hereunder, the Current Market Price shall
be determined in good faith by at least a majority of the members of the Board
of Directors of the Corporation, or, if such determination cannot be made, by a
nationally recognized independent investment banking firm selected by the Board
of Directors of the Corporation (or if such selection cannot be made, by a
nationally recognized independent investment banking firm selected by the
American Arbitration Association in accordance with its rules); provided
--------
further, that if the Common Stock is listed on any national securities exchange,
the term "business days," as used in this clause (vi), shall mean business days
on which such exchange is open for trading.
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<PAGE>
(vii) In any case in which the provisions of this Section 6(c) shall
require that an adjustment shall become effective immediately after a record
date for an event, the Corporation may defer until the occurrence of such event
(i) issuing to the holder of any share of SERIES B Convertible Preferred Stock
converted after such record date and before the occurrence of such event the
additional shares of capital stock issuable upon the conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (ii)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 6(b) hereof; provided however, that the
-----------------
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares and
such cash upon the occurrence of the event requiring such adjustment.
(d) Whenever the Conversion Price shall be adjusted as provided in
Section 6(c) hereof, the Corporation shall prepare a statement, signed by its
chief financial officer, setting forth the facts requiring such adjustment and
she-wing the calculation of the Conversion Price that shall be in effect after
such adjustment. The Corporation shall cause a copy of such statement to be sent
by mail first class, postage prepaid, or by a national overnight delivery
service, to each holder of shares of the SERIES B Convertible Preferred Stock at
his address appearing on the Corporation's records. Where appropriate, such copy
may be given in advance and may be included as part of a notice required to be
mailed under the provisions of Section 6(e) hereof.
(e) In the event the Corporation shall propose to take any action of
the types described in clauses (i) (ii) (iii) or (iv) of Section 6(c) hereof,
the Corporation shall give notice to each holder of shares of the SERIES B
Convertible Preferred Stock, in the manner set forth in Section 6(d) hereof,
which notice shall specify the record date, if any, with respect to any such
action and the date on which such action is to take place. Such notice shall
also set forth such facts with respect thereto as shall be reasonably necessary
to indicate the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Price and the number kind or class of
shares or other securities or property which shall be deliverable or purchasable
upon the occurrence of such action or deliverable upon conversion of shares of
SERIES B Convertible Preferred Stock. Such notice shall be given at least ten
(10) days prior to the date so fixed. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of any such action.
(f) For the purposes of this Section 6, the sale or other disposition
of any capital stock of the Corporation theretofore held in its treasury shall
be deemed to be an issuance thereof.
(g) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of the SERIES B
Convertible Preferred Stock, provided, however, that the Corporation shall not
-------- -------
be required to pay any taxes that may be payable in respect of any transfer
involved in the issuance or delivery of any certificate for such shares in a
name other than that of the holder of the shares of SERIES B Convertible
Preferred Stock in respect of which such shares are being issued.
- 9 -
<PAGE>
(h) The Corporation shall reserve, free from preemptive rights, out of
its treasury stock or authorized but unissued shares of the Corporation's Common
Stock, or both, solely for the purpose of effecting the conversion of the shares
of the SERIES B Convertible Preferred Stock pursuant to this Section 6 a
sufficient number of shares to provide for the conversion of all outstanding
shares of the SERIES B Convertible Preferred Stock.
(7) Voting Rights.
--------------
(a) The holders of record of shares of SERIES B Convertible Preferred
Stock shall not be entitled to any voting rights except as hereinafter provided
in this Section 7 or as otherwise provided by law.
(b) So long as any shares of SERIES B Convertible Preferred Stock are
outstanding, the Corporation will not, without the affirmative vote or consent
of the holders of at least a majority of the outstanding shares of SERIES B
Convertible Preferred Stock, voting as a class (i) create, authorize or issue
any shares of any other class of senior or parity dividend stock or senior or
parity liquidation stock or having class voting rights except as required by the
Delaware General Corporation Law or voting rights in excess of one vote per
share, (ii) amend, alter or repeal, whether by merger, consolidation or
otherwise, the Corporation's Certificate of Incorporation if the amendment,
alteration or repeal affects the powers, preferences or special rights of the
SERIES B Convertible Preferred Stock, or (iii) declare any reverse stock
dividend with respect to the SERIES B Convertible Preferred Stock or otherwise
reduce the number of outstanding shares of SERIES B Convertible Preferred Stock
other than pursuant to Section 4 or 5 hereof; provided, however, that the
approval of not less than two-thirds of the outstanding shares of SERIES B
Convertible Preferred Stock, voting as a class, shall be required to amend,
alter, or repeal any of the terms of this Certificate of Designation.
(8) Issuance of Additional Shares. The Corporation shall not issue any
-----------------------------
shares of SERIES B Convertible Preferred Stock other than (a) 90,000 shares to
be issued promptly after the filing of this Certificate of Designation and (b)
shares that may be issued in payment of dividends on the outstanding shares of
SERIES B Convertible Preferred Stock from time to time pursuant to Section 3(a)
hereof. In addition, the Corporation shall not issue or sell any shares of
Common Stock or any other securities, whether directly or indirectly convertible
into or exchangeable or exercisable for shares of its Common Stock
(collectively, "Convertible Securities"), for a consideration price per share
less than the fair market value per share then in effect, absent the Board of
Directors approval and a reasonable business purpose for said issuance.
IN WITNESS WHEREOF, Penn Octane Corporation has caused this certificate to
be signed by its Chairman of the Board and Chief Executive Officer and attested
by its Secretary this ____ day of May, 1999.
- 10 -
<PAGE>
PENN OCTANE CORPORATION
By: ______________________________
Jerome B. Richter
Chairman of the Board and Chief Executive Officer
ATTEST:
__________________________
Jorge Bracamontes, Secretary
- 11 -
<PAGE>
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of July 15, 1999 by and
between Steve Payne (the "Purchaser") and Penn Octane Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 50,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 15, 2002 at $3.25 per share of Common Stock (subject to
adjustment), to purchase 25,000 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 One Hundred Thousand ($100,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 15, 1999 at 5:00 P.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.
2
<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 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
3
<PAGE>
information and data which the Purchaser and his advisors (if any) believe to be
necessary in order to reach an informed decision as to the advisability of
investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the 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
4
<PAGE>
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 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.
5
<PAGE>
(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.
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:
6
<PAGE>
(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. No fee.
---
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.
7
<PAGE>
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
(b) If to the Purchaser, at the following address:
Steve Payne
1707 Sunset Drive
Carbondale, IL 62901
8
<PAGE>
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.
9
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 15 day of July 1999.
STEVE PAYNE
By:
-----------------------------------------
Name: Steve Payne
Title:
PENN OCTANE CORPORATION
By:
-----------------------------------------
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Steve Payne ("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
<PAGE>
transferred, new certificates or other evidences of ownership for them not
bearing a legend restricting further transfer and not subject to any stop
transfer order or other restrictions on transfer shall have been delivered by
the Company and subsequent disposition of such securities shall not require
registration or qualification of such securities under the Securities Act or any
state securities laws then in force or (iv) the sale of such securities by 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
<PAGE>
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
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.
(b) In the event the Company does not participate in Piggy-Back
registration, all Registrable Securities will be registered by January 31, 2000.
<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 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
<PAGE>
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)).
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.
<PAGE>
(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
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
<PAGE>
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
<PAGE>
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 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).
<PAGE>
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.
(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 July 15,
1999.
PENN OCTANE CORPORATION
By:
------------------------------------------
Ian T. Bothwell
Vice President and Chief Financial Officer
Steve Payne
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 July 15, 2002
Warrant to Purchase 25,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
STEVE PAYNE
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 July 15, 2002 (or, if such date is not a Business Day in Redwood City,
California, then on the next succeeding day which shall be a Business Day),
25,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.25 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>
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
<PAGE>
quoted on the National Association of Securities Dealers Automated Quotation
System or, if not so quoted, then as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company. If there shall
be no meaningful over-the-counter market, then Fair Market Value shall be such
amount, not less than book value, as may be determined by the Board of Directors
of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
-------------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the provisions of Section 11 below and any restriction on transfer
applicable hereto pursuant to the securities laws of the United States or any
State, upon surrender of this Warrant to the Company with an assignment form
duly executed, and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment, and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged, and the term "Holder" as used herein includes any holder
of any Warrant into which this Warrant may be divided or for which this Warrant
may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
-----------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price 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;
<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.
<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
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.
<PAGE>
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 $4.50 for ten 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 ten (10) 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
<PAGE>
amount as the Company may determine and 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 law principles.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
Dated: July 15, 1999
<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>
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of July 16, 1999 by and
between the Apogee Fund L.P. (the "Purchaser") and Penn Octane Corporation, a
Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 100,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 16, 2002 at $3.25 per share of Common Stock (subject to
adjustment), to purchase 50,000 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 Thousand ($200,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 16, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. No fee.
---
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.
- 7 -
<PAGE>
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
(b) If to the Purchaser, at the following address:
The Apogee Fund L.P.
201 Main Street
Suite 1555
Fort Worth, TX 76102
- 8 -
<PAGE>
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 16 day of July 1999.
THE APOGEE FUND L.P.
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial 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 Apogee Fund L.P. ("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
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.
1
<PAGE>
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
2
<PAGE>
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
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.
(b) In the event the Company does not participate in Piggy-Back
registration, all Registrable Securities will be registered by January 31, 2000.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 13,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
The Apogee Fund L.P.
By: ____________________________________
Name:
Title:
10
<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 July 16, 2002
Warrant to Purchase 50,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
THE APOGEE FUND L.P.
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 July 16, 2002 (or, if such date is not a Business Day in Redwood City,
California, then on the next succeeding day which shall be a Business Day),
50,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.25 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>
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
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>
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
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.
5
<PAGE>
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 $4.50 for ten 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial Officer
Dated: July 16, 1999
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 July 21, 1999 by and
between Igor Kent (the "Purchaser") and Penn Octane Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 40,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.25 per share, and (ii) a warrant,
exercisable until July 21, 2002 at $3.25 per share of Common Stock (subject to
adjustment), to purchase 20,000 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 Ninety Thousand ($90,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 21, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. No fee.
---
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.
- 7 -
<PAGE>
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
(b) If to the Purchaser, at the following address:
Igor Kent
____________
____________
- 8 -
<PAGE>
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21 day of July 1999.
IGOR KENT
By:
Name: Igor Kent
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Igor Kent ("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
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.
1
<PAGE>
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
2
<PAGE>
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
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.
(b) In the event that the Registrable Securities are not registered through
a Piggy-Back registration, the Company will register all Registrable Securities
by January 31, 2000.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 21,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
Igor Kent
By: ____________________________________
Name:
Title:
10
<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 July 21, 2002
Warrant to Purchase 20,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
IGOR KENT
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 July 21, 2002 (or, if such date is not a Business Day in Redwood City,
California, then on the next succeeding day which shall be a Business Day),
20,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.25 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>
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
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>
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
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.
5
<PAGE>
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 $4.50 for ten 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial
Officer
Dated: July 21, 1999
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 July 29, 1999 by and
between Southwest Concept Inc. (the "Purchaser") and Penn Octane Corporation, a
Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 15,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 29, 2003 at $3.00 per share of Common Stock (subject to
adjustment), to purchase 7,500 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 Thirty Thousand ($30,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 29, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. The Company shall be responsible for all fees required to be
---
paid in connection with the Purchase Agreement.
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.
- 7 -
<PAGE>
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
- 8 -
<PAGE>
(b) If to the Purchaser, at the following address:
Southwest Concept Inc.
17110 Dallas Parkway, Suite 120
Dallas, TX 75248
Attn: Mr. Clint Norton
(972) 931-8509
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 29 day of July 1999.
SOUTHWEST CONCEPT INC.
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Southwest Concept Inc. ("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
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.
1
<PAGE>
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.
2
<PAGE>
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
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.
(b) In the event the Company does not register the Registrable
Securities as provided in 3-(a) above and/or through a Registration Statement
covering the Registrable Securities by December 1, 1999, then the Company agrees
that the holders of the Registrable Securities shall be entitled to receive an
amount equal to 10% of the amount originally paid to acquire the Registrable
Securities in connection with the Purchase Agreement among the parties (the
"Penalty"). The holders of the Registrable Securities shall be entitled to
receive the Penalty on each monthly anniversary thereafter until the Registrable
Securities have been registered. The Penalty may be paid in cash and/or common
stock, at the sole option of the Company. If the Penalty is paid in common
stock, then the price used to determine the amount of shares shall be based on
the average trading price of Penn Octane Corporation common stock on the first
trading day subsequent to the incurrence of the Penalty. In the event that the
Company elects to pay the Penalty through shares of common stock of the Company,
then such shares shall be included as Registrable Securities as provided for
herein.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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 13 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 29,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
SOUTHWEST CONCEPT INC.
By: ____________________________________
Name:
Title:
10
<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 July 29, 2003
Warrant to Purchase 7,500 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 July 29, 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),
7,500 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial
Officer
Dated: July 29, 1999
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 July 29, 1999 by and
between Clint Norton (the "Purchaser") and Penn Octane Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 22,500 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 29, 2003 at $3.00 per share of Common Stock (subject to
adjustment), to purchase 11,250 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 Forty-Five Thousand ($45,000.00) Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 29, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. The Company shall be responsible for all fees required to be
---
paid in connection with the Purchase Agreement.
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.
- 7 -
<PAGE>
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
- 8 -
<PAGE>
(b) If to the Purchaser, at the following address:
Southwest Concept Inc.
17110 Dallas Parkway, Suite 120
Dallas, TX 75248
Attn: Mr. Clint Norton
(972) 931-8509
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 29 day of July 1999.
CLINT NORTON
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Clint Norton ("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
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.
1
<PAGE>
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.
2
<PAGE>
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 pursuant 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
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.
(b) In the event the Company does not register the Registrable
Securities as provided in 3-(a) above and/or through a Registration Statement
covering the Registrable Securities by December 1, 1999, then the Company agrees
that the holders of the Registrable Securities shall be entitled to receive an
amount equal to 10% of the amount originally paid to acquire the Registrable
Securities in connection with the Purchase Agreement among the parties (the
"Penalty"). The holders of the Registrable Securities shall be entitled to
receive the Penalty on each monthly anniversary thereafter until the Registrable
Securities have been registered. The Penalty may be paid in cash and/or common
stock, at the sole option of the Company. If the Penalty is paid in common
stock, then the price used to determine the amount of shares shall be based on
the average trading price of Penn Octane Corporation common stock on the first
trading day subsequent to the incurrence of the Penalty. In the event that the
Company elects to pay the Penalty through shares of common stock of the Company,
then such shares shall be included as Registrable Securities as provided for
herein.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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 13 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 29,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
CLINT NORTON
By: ____________________________________
Name:
Title:
10
<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 July 29, 2003
Warrant to Purchase 11,250 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 July 29, 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),
11,250 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial
Officer
Dated: July 29, 1999
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 July 30, 1999 by and
between Europa International, Inc. (the "Purchaser") and Penn Octane
Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 225,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 30, 2003 at $3.00 per share of Common Stock (subject to
adjustment), to purchase 112,500 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 Four Hundred And Fifty Thousand ($450,000.00)
Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 30, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. The Company shall be responsible for all fees required to be
---
paid in connection with the Purchase Agreement.
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.
- 7 -
<PAGE>
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
- 8 -
<PAGE>
(b) If to the Purchaser, at the following address:
Europa International, Inc.
c/o Knoll Capital
200 Park Avenue
Suite 3900
New York, NY 10166
Attn: Mr. Fred Knoll
212 808-7474
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 30 day of July 1999.
EUROPA INTERNATIONAL, INC.
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Europa International, Inc.
("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
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.
1
<PAGE>
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
2
<PAGE>
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
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.
(b) In the event the Company does not register the Registrable
Securities as provided in 3-(a) above and/or through a Registration Statement
covering the Registrable Securities by December 1, 1999, then the Company agrees
that the holders of the Registrable Securities shall be entitled to receive an
amount equal to 10% of the amount originally paid to acquire the Registrable
Securities in connection with the Purchase Agreement among the parties (the
"Penalty"). The holders of the Registrable Securities shall be entitled to
receive the Penalty on each monthly anniversary thereafter until the Registrable
Securities have been registered. The Penalty may be paid in cash and/or common
stock, at the sole option of the Company. If the Penalty is paid in common
stock, then the price used to determine the amount of shares shall be based on
the average trading price of Penn Octane Corporation common stock on the first
trading day subsequent to the incurrence of the Penalty. In the event that the
Company elects to pay the Penalty through shares of common stock of the Company,
then such shares shall be included as Registrable Securities as provided for
herein.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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 13 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 30,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
EUROPA INTERNATIONAL, INC.
By: ____________________________________
Name:
Title:
10
<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 July 30, 2003
Warrant to Purchase 112,500 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
EUROPA INTERNATIONAL, 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 July 30, 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),
112,500 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial Officer
Dated: July 30, 1999
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 July 30, 1999 by and
between Valor Capital Management L.P. (the "Purchaser") and Penn Octane
Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 75,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 30, 2003 at $3.00 per share of Common Stock (subject to
adjustment), to purchase 37,500 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 One Hundred And Fifty Thousand ($150,000.00)
Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 30, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 3 -
<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 his advisors (if any) have received all
information and data which the Purchaser and his advisors (if any) believe to be
necessary in order to reach an informed decision as to the advisability of
investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. The Company shall be responsible for all fees required to be
---
paid in connection with the Purchase Agreement.
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.
- 7 -
<PAGE>
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
- 8 -
<PAGE>
(b) If to the Purchaser, at the following address:
Valor Capital Management L.P.
c/o Knoll Capital
200 Park Avenue
Suite 3900
New York, NY 10166
Attn: Mr. Fred Knoll
212 808-7474
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 30 day of July 1999.
VALOR CAPITAL MANAGEMENT L.P.
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Valor Capital Management L.P.
("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.
1
<PAGE>
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
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
2
<PAGE>
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
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.
(b) In the event the Company does not register the Registrable
Securities as provided in 3-(a) above and/or through a Registration Statement
covering the Registrable Securities by December 1, 1999, then the Company agrees
that the holders of the Registrable Securities shall be entitled to receive an
amount equal to 10% of the amount originally paid to acquire the Registrable
Securities in connection with the Purchase Agreement among the parties (the
"Penalty"). The holders of the Registrable Securities shall be entitled to
receive the Penalty on each monthly anniversary thereafter until the Registrable
Securities have been registered. The Penalty may be paid in cash and/or common
stock, at the sole option of the Company. If the Penalty is paid in common
stock, then the price used to determine the amount of shares shall be based on
the average trading price of Penn Octane Corporation common stock on the first
trading day subsequent to the incurrence of the Penalty. In the event that the
Company elects to pay the Penalty through shares of common stock of the Company,
then such shares shall be included as Registrable Securities as provided for
herein.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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 13 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 30,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
VALOR CAPITAL MANAGEMENT L.P.
By: ____________________________________
Name:
Title:
10
<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 July 30, 2003
Warrant to Purchase 37,500 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
VALOR CAPITAL MANAGEMENT L.P.
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 July 30, 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),
37,500 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial Officer
Dated: July 30, 1999
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 July 30, 1999 by and
between Lincoln Trust Company FBO Perry D. Snavely IRA (the "Purchaser") and
Penn Octane Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 62,500 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $2.00 per share, and (ii) a warrant,
exercisable until July 30, 2003 at $3.00 per share of Common Stock (subject to
adjustment), to purchase 31,250 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 One Hundred and Twenty-Five Thousand ($125,000.00)
Dollars.
<PAGE>
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on July 30, 1999 at 5:00 P.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.
- 2 -
<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 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.
- 3 -
<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 his advisors (if any) have received all
information and data which the Purchaser and his advisors (if any) believe to be
necessary in order to reach an informed decision as to the advisability of
investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the 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.
- 5 -
<PAGE>
(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.
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:
- 6 -
<PAGE>
(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. The Company shall be responsible for all fees required to be
---
paid in connection with the Purchase Agreement.
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.
- 7 -
<PAGE>
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Kevin Finck, Esq.
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
- 8 -
<PAGE>
(b) If to the Purchaser, at the following address:
Lincoln Trust Company FBO Perry D. Snavely IRA
P.O. Box 5831
Denver, CO 80217
Attn: Monica Rice
(610) 260-6388
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.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 30 day of July 1999.
LINCOLN TRUST COMPANY
FBO PERRY D. SNAVELY IRA
By:
Name:
Title:
PENN OCTANE CORPORATION
By:
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
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 Lincoln Trust Company FBO Perry D.
Snavely IRA ("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
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.
1
<PAGE>
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
2
<PAGE>
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
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.
(b) In the event the Company does not register the Registrable
Securities as provided in 3-(a) above and/or through a Registration Statement
covering the Registrable Securities by December 1, 1999, then the Company agrees
that the holders of the Registrable Securities shall be entitled to receive an
amount equal to 10% of the amount originally paid to acquire the Registrable
Securities in connection with the Purchase Agreement among the parties (the
"Penalty"). The holders of the Registrable Securities shall be entitled to
receive the Penalty on each monthly anniversary thereafter until the Registrable
Securities have been registered. The Penalty may be paid in cash and/or common
stock, at the sole option of the Company. If the Penalty is paid in common
stock, then the price used to determine the amount of shares shall be based on
the average trading price of Penn Octane Corporation common stock on the first
trading day subsequent to the incurrence of the Penalty. In the event that the
Company elects to pay the Penalty through shares of common stock of the Company,
then such shares shall be included as Registrable Securities as provided for
herein.
3
<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 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)).
4
<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.
5
<PAGE>
(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
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
6
<PAGE>
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7
<PAGE>
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 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 13 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).
8
<PAGE>
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.
(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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of July 30,
1999.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell
Vice President and Chief Financial Officer
LINCOLN TRUST COMPANY
FBO PERRY D. SNAVELY IRA
By: ____________________________________
Name:
Title:
10
<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 July 30, 2003
Warrant to Purchase 31,250 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on July 30, 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),
31,250 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial
Officer
Dated: July 30, 1999
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>
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 July 30, 2003
Warrant to Purchase 40,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
STERLING 2000 INVESTMENTS
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 July 30, 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),
40,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $3.00 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
<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
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>
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
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.
5
<PAGE>
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 $4.50 for twenty 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 ten (10) 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
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.
6
<PAGE>
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:
Ian T. Bothwell
Vice President and Chief Financial Officer
Dated: July 30, 1999
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>
LEASE/INSTALLMENT PURCHASE AGREEMENT
FOR TWO (2) 15-MILE PIPELINES
THIS AGREEMENT ("Agreement") is made and entered into as of _________ ___, 1998
by and between PENN OCTANE CORPORATION, a Delaware corporation ("POC"), and CPSC
INTERNATIONAL, a Texas corporation ("CPSC") (collectively referred to as the
"Parties" and individually referred to as a "Party" where either POC or CPSC
could apply).
WHEREAS, CPSC has agreed to design, construct and own two (2) "Pipelines" (as
hereinafter defined) and to lease the Pipelines to POC, and POC has agreed to
lease the Pipelines from CPSC and to pay the Rental (as hereinafter defined),
all under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
benefits to be derived by each Party hereunder and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties agree as follows:
1. DEFINITIONS
1.1. Definitions. The following terms as used in this Agreement shall have
the respective meanings assigned to them below:
1.1.1. "Pipelines" means those two (2) Pipelines, approximately fifteen (15)
miles in length and with a nominal 8.625 inch outside diameter (8.625" O.D.), to
be constructed in Cameron County, Texas, as more particularly described in
Exhibit "A" attached hereto and made a part hereof.
1.1.2. "Facilities" means the vents, casings, valves, cathodic protection
devices, and other items of personal property which are constructed on, affixed
to or installed on the Pipelines inlet flange to inlet flange and equipment or
facilities used in the operation or monitoring of the Pipelines.
1.1.3. "Easements" means those Pipelines right-of-way permits, licenses and
easements which are to be physically occupied by the Pipelines and the
Facilities and or necessary to operate the Pipelines and the Facilities as set
out in the final design.
1.1.4. "Operator" means CPSC or its designee.
1.1.5. "Pipeline Assets" means the Pipelines together with the Facilities
and the Easements.
<PAGE>
1.1.6. "Operating Requirements" means the general description of the
Pipelines and Facilities to be constructed by CPSC and the expected operating
requirements as determined by POC and as set forth in Exhibit "B" hereto.
1.1.7. "Substantial Completion Date" is defined in Section 3.6.
1.1.8. "Lease Anniversay Date" means twelve (12) months after the first day
of the month during which the "Substantial Completion Date" occurs.
1.1.9. "Month" means a calendar month.
1.1.10."Lease Effective Date" means the first day of the Month in which the
Substantial Completion Date occurs.
1.1.11"Initial Lease Year" means the period commencing on the Lease Effective
Date and ending on the first Lease Anniversary Date thereafter.
1.1.12."Lease Year" means the Initial Lease Year or any subsequent twelve-month
period commencing on a Lease Anniversary Date during the term of this Agreement.
1.1.13."Lease Term" is defined in Section 3.8.
1.2. Other Definitions. Terms defined in other portions of this Agreement
------------------
shall have the respective meanings so assigned to them in this Agreement.
2. DESIGN AND CONSTRUCTION
2.1. Design and Specifications. CPSC shall proceed promptly and with due
---------------------------
diligence to prepare the engineering design and specifications of the Pipelines
and the Facilities in order to comply with the Operating Requirements. CPSC
shall complete and provide POC with a copy of such design in accordance with
Exhibit "B", which POC shall expeditiously review. CPSC shall receive POC's
written approval of such design of the Pipelines and the Facilities prior to
commencement of construction. Such design, which may be subsequently altered,
will be described in words and mapped and shall become Exhibit "A".
2.2. Construction. Following POC's approval of the design, CPSC will
------------
proceed promptly and with due diligence to acquire the Easements and to
construct the Pipelines and the Facilities in accordance with Exhibit "B" and
approved design and specifications.
2
<PAGE>
2.3. Design and Construction Costs. CPSC shall bear and pay the costs
--------------------------------
incurred in connection with the design and construction of the Pipelines and the
Facilities and the acquisition of the Easements.
2.4. Ownership. Except as otherwise provided in Section 5, and unless and
---------
until the option to purchase provided for in Section 5 is exercised, CPSC shall
be the owner of the Pipelines, the Facilities and the Easements.
2.5. Inspection of Materials and Work.
-------------------------------------
2.5.1. The plans and specifications for the Pipelines are referred to in
this Agreement as "the Design and Specifications" which shall be included in
Exhibit "A".
2.5.2. In accordance with the following provisions, prior to the Substantial
Completion Date, POC shall have the right to inspect the Pipelines and the
Facilities and satisfy itself as to their condition and compliance with the
Design and Specifications. In this regard, CPSC shall furnish to POC access at
all reasonable times to all pipe and other materials to be used in the
construction of the Pipelines and Facilities and to the work of construction of
the Pipelines and Facilities whenever work is in progress, in order that POC may
examine and inspect the pipe and other materials and observe the work and may
assure itself that the terms of the Design and Specifications are being met.
POC shall have the right to conduct such inspections of the pipe and other
materials to be used in the construction of the Pipelines and Facilities and of
the work at its sole cost, risk and expense. POC and CPSC contemplate that POC
will be given the opportunity to conduct thorough inspections of all work and
all pipe and other materials in the construction of the Pipelines and
Facilities, and that POC will at its discretion conduct inspections of and will
observe certain pipe and materials and certain work as the work progresses and
segments are being constructed. In this connection,
2.5.2.1. POC shall designate a representative of POC ("POC's
Representative") in order to perform inspections on behalf of POC at POC's
discretion and who shall communicate with CPSC on behalf of POC regarding any
such inspections, notify CPSC of any defective pipe or other equipment and
defects in work or failure to comply with the Design and Specifications
discovered during such inspections, and shall communicate with CPSC regarding
the curing of any discovered defects and repairs to or replacements of any such
defective work and materials.
3
<PAGE>
2.5.2.2. CPSC shall designate a representative of CPSC ("CPSC's
Representative") who shall be responsible for communicating with POC's
Representative on behalf of CPSC for purposes of this Section 2.5.2.2. and shall
be physically present or available by telephone or telefax during inspections by
POC's Representative;
2.5.2.2.1. POC's Representative shall coordinate such inspections to avoid
unnecessarily delaying the progress of work and shall conduct such inspections
of pipe, coating and welding when pipe and workmanship are available for
inspection (that is, before being lowered into the ditch and covered), and CPSC
shall not be obligated to subsequently uncover pipe for inspection which was not
conducted when POC had the reasonable opportunity to do so when the pipe and
workmanship were available for inspection; and
2.5.2.2.2. If, in the reasonable judgment of POC, work or pipe or other
materials are defective or fail to comply with the Specifications, POC's
Representative shall notify CPSC's Representative at the time of POC's
Representative's discovery of such defect or failure or as soon thereafter as
possible, and CPSC shall repair or replace the defective work or materials in a
manner complying with the Design and Specifications (in this regard, any such
notification by POC's Representative which is not initially made in writing
shall be confirmed in writing by POC's Representative within twenty-four hours
after the applicable inspection). The scope of such inspections shall be limited
to determining whether the inspected pipe and materials and the results of the
work comply with the Design and Specifications.
3. PIPELINE LEASE AND RENTAL
3.1. Pipeline Lease. For and in consideration of POC's payment of the
---------------
rentals herein provided, CPSC hereby agrees to lease and let unto POC, effective
as of the Lease Effective Date, the Pipelines and the Facilities for the Lease
Term (as herein defined), on the terms set forth herein. During the Lease Term,
the Pipelines and the Facilities shall be operated by the Operator in accordance
with the terms of the Operating Agreement attached hereto as Exhibit "C".
4
<PAGE>
3.2. Rental. For the duration of the Lease Term (as herein defined), POC
------
shall pay to CPSC as rental the sum of One Million Twenty Thousand Dollars
($1,020,000.00) per Lease Year (the "Rental"), subject to following provisions
of this Section 3.2. The Rental for each Lease Year is payable in twelve (12)
equal monthly installments of Eighty-Five Thousand Dollars ($85,000.00) each,
due and payable on or before the last day of each Month provided, however, if
the Substantial Completion Date does not occur on the first day of the Month,
then, solely with respect to the installment of rental payable for the initial
Month of the Initial Lease Year. POC shall make an entire monthly installment.
Such payment shall be considered a prepayment for the partial month's rental at
the end of the Lease Term. POC shall require its customer to make all payments
to an escrow account in the name of CPSC. An escrow agent (RZB) will deduct the
lease payment and any other funds due CPSC from the escrow account and remit the
remainder to POC. A sample escrow agreement is attached as Exhibit "F."
3.3. Letter of Credit. POC shall provide, at closing of the Lease
------------------
Installment Agreement, an irrevocable standby letter of credit to guarantee
payments to CPSC in the amount of Five Hundred Ten Thousand Dollars
($510,000.00). If there is a default in payment, CPSC can call on the letter of
credit for payment. The irrevocable letter of credit will be obtained from a
first rated bank acceptable to CPSC.
3.4. Security Agreement. POC will grant CPSC a first priority security
-------------------
interest in all of its assets (except for accounts receivable and inventory)
including; the POC contract rights with Seadrift, Exxon, and PMI or other PEMEX
entities as security for the timely payment of the lease payments. POC will
provide U.C.C. and lien documents as necessary to perfect CPSC's priority
interest herein mentioned.
5
<PAGE>
3.5. Default.
-------
3.5.1. Each of the following shall be deemed a default by POC and a breach
of this Agreement:
3.5.1.1. Filing of a petition for adjudication as a bankrupt, or for
reorganization, or for an arrangement under any Federal or State statue;
3.5.1.2. Dissolution or liquidation of POC, without the transfer to and
assumption by a financially responsible third party of this Agreement;
3.5.1.3. Appointment of a permanent or temporary receiver or a permanent or
temporary trustee of all or substantially all the property of POC;
3.5.1.4. Taking possession of the property of POC by a governmental officer
or agency pursuant to statutory authority for dissolution, rehabilitation,
reorganization or liquidation; or
3.5.1.5. Making by POC of an assignment for the benefit or creditors.
3.5.1.6. Filing of a voluntary or involuntary lien on the assets of POC that
are security for this lease.
If any event mentioned in this Section 3.5.1. shall occur, CPSC may thereupon or
at any time within ninety (90) days thereafter elect to terminate this Agreement
upon ten (10) days' prior written notice to POC and this Agreement shall
terminate on the day in such notice specified with the same force and effect as
if that date were the date herein fixed for the Term of this Agreement.
3.5.2. Default in the payment of the rental or any other amount herein
reserved or any part thereof for a period of twenty (20) days after written
notice of such default from CPSC.
3.5.3. In the event of any default under Section 3.5.1. and/or 3.5.2., CPSC,
at its option, in addition to all other rights, can present a letter of default
to the __________ bank and draw down on the letter of credit provided by POC,
and can repossess and assume all rights in any assets or agreements that
constitute security for this lease.
6
<PAGE>
3.5.4. Default in the performance of any other covenant or condition of this
Agreement on the part of either party to be performed for a period of thirty
(30) days after written notice from the non-defaulting party specifying the
nature of such default. For purposes of this Section 3.5.4., no default on the
part of either party in performance of work required to be performed or acts to
be done shall be deemed to exist if after receipt of the aforesaid notice the
party in default diligently takes action to rectify the same and prosecutes such
action towards completion with reasonable diligence, subject, however, to
avoidable delays.
3.5.5. In case of any such default under Section 3.5.2. and/or Section
3.5.4. and at any time within ninety (90) days thereafter following the
expiration of the respective grace periods above-mentioned, the non-defaulting
party may serve a notice upon the defaulting party electing to terminate this
Agreement upon a specified date not less than thirty (30) days after the date of
serving such notice and this Agreement shall expire on the date so specified as
if that date had been originally fixed as the expiration date of the Term herein
granted. However, a default under Section 3.5.2. and/or Section 3.5.4. shall be
deemed waived if such default is remedied before the date specified for
termination in the notice of termination served on the defaulting party pursuant
to this Section 3.5.5.
3.6. Substantial Completion. In the event that CPSC, using its best
-----------------------
efforts, determines that it will not be able to meet the Substantial Completion
Date, CPSC shall immediately inform POC. When, in CPSC's judgment, CPSC has
completed the Pipelines and Facilities in a condition to be placed in service,
CPSC shall conduct a hydrostatic pressure test in accordance with the Design and
Specifications. If the Pipelines and Facilities fail to satisfy such test, CPSC
shall use all reasonable efforts to repair the Pipelines and Facilities so that
the Pipelines and Facilities satisfy such test. "Substantial Completion Date"
as used herein shall occur when, and shall mean the date on which, the Pipelines
and Facilities have satisfied such hydrostatic pressure test and are clean and
dry internally so as to be ready to be placed in service ("Substantial
Completion"). CPSC shall use its best efforts to obtain all necessary rights of
way and design, engineer, construct, test and obtain permits for the Pipelines
and Facilities so that the Substantial Completion Date is no later than May 1,
1999.
3.7. Certificate. When substantial completion has occurred, the Parties
-----------
shall execute a certificate substantially in the form of Exhibit "D" attached
hereto setting forth such fact, specifying the Substantial Completion Date, and
acknowledging that the lease of the Pipelines and Facilities commences on the
Lease Effective Date.
7
<PAGE>
3.8. Lease Term. The Pipelines and the Facilities are leased for a term
-----------
commencing on the Lease Effective Date and ending on the last day of the
fifteenth (15th) Lease Year or if prior to such date, at the end of the Lease
Year during which POC exercises its option to purchase under Section 5 (i.e.,
the 10th, or 15th Lease Year, as applicable) (the "Lease Term").
3.9. Insurance. Throughout the Lease Term, CPSC shall, at CPSC's expense,
---------
provide liability insurance or self insurance.
3.10. Damage or Destruction. If the Pipelines Assets, or any portion
-----------------------
thereof, shall be damaged or destroyed during the Lease Term due to causes other
than either a) Operator's failure to perform any obligations under the terms
hereof (including Exhibit "B") or b) Operator's negligence then, POC may elect
whether or not to repair or rebuild the Pipeline Assets; provided, however, CPSC
shall not have any duty, liability, or responsibility to perform any repairs,
replacement, or reconstruction not fully funded by POC; and also provided that
if Operator shall proceed as promptly as practicable to complete such repair or
rebuilding with all due diligence and due care and shall make available for
inspection by POC as provided by Section 2.5 all work and materials used to
repair or rebuild. In event of any such damage or destruction, and POC elects
not to repair or rebuild, POC shall have the right to terminate the Lease and
Operating Agreement forthwith and POC and CPSC shall negotiate to determine the
unrecovered capital POC shall pay, with any salvaged or income from reletting
all or a portion of the Pipelines to be subtracted from the unrecovered capital.
3.11. Indemnification of POC. Except as otherwise expressly provided below,
----------------------
from and after the effective date hereof, including the period of design,
engineering and construction of the Pipelines and Facilities and while CPSC is
Operator, CPSC shall defend, indemnify, and hold harmless POC, its officers,
agents, representatives and employees from and against any and all claims,
losses, damages, causes of action, suits, and liability of every kind
(including, without limitation, expenses of litigation, court costs and
attorneys' fees) of or by any person or entity (including, without limitation,
CPSC and its employees) for injury to or death of any person or persons, or for
damage to any property, arising out of or in connection with operation, repair,
replacement, or maintenance of the Pipeline Facilities, or the escape or loss of
any gas or other substance therein or transported thereby, including, without
limitation, injuries, death, or damages caused by POC's sole negligence or joint
negligence except only injuries, death, or damages caused by POC's gross
negligence or willful misconduct. THE PARTIES EXPRESSLY INTEND THAT THE
INDEMNITY PROVIDED IN THIS SECTION 3.11 INCLUDES THE OBLIGATION OF CPSC TO
INDEMNIFY AND PROTECT POC FROM THE CONSEQUENCES OF POC's OWN NEGLIGENCE, WHETHER
THAT NEGLIGENCE IS THE SOLE OR A CONCURRING CAUSE OF THE INJURY, DEATH OR
DAMAGE.
8
<PAGE>
3.12. Indemnification of CPSC. For claims, losses, damages, causes of
-------------------------
action, suits, and liability of every kind (including, without limitation,
expenses of litigation, court costs and attorneys' fees) arising at any time POC
is, providing that such claim arises when CPSC is not Operator of the pipelines
under any other arrangement, POC shall defend indemnify and hold harmless CPSC
its officers, agents, representatives and employees from and against any and all
claims, losses, damages, causes of action, suits, and liability of every kind
(including, without limitation, expenses of litigation, court costs and
attorneys' fees) of or by any person or entity (including, without limitation,
POC and its employees) for injury to or death of any person or persons, or for
damage to any property, arising out of or in connection with operation, repair,
replacement, or maintenance of the Pipeline Facilities, or the escape or loss of
any product or other substance therein or transported thereby, including,
without limitation, injuries, death, or damages caused by CPSC's sole negligence
or joint negligence except only injuries, death, or damages caused by CPSC's
gross negligence or willful misconduct. THE PARTIES EXPRESSLY INTEND THAT THE
INDEMNITY PROVIDED IN THIS SECTION 3.12 INCLUDES THE OBLIGATION OF POC TO
INDEMNIFY AND PROTECT CPSC FROM THE CONSEQUENCES OF CPSC's OWN NEGLIGENCE,
WHETHER THAT NEGLIGENCE IS THE SOLE OR A CONCURRING CAUSE OF THE INJURY, DEATH
OR DAMAGE.
3.13. Maintenance. The Rental payments set out in Section 3.2 shall include
-----------
all routine maintenance. In the event there is a change in regulations
governing the operation of the Pipeline Assets which results in a substantial
increase in maintenance costs the parties agree to meet to arrive at a mutually
agreeable adjustment to Rental.
3.14. Progress Reports. CPSC shall provide POC progress reports which
------------------
detail the status of the construction and operation of the Pipeline Facilities.
4. OPERATOR
4.1 Initial Operator. CPSC, or its designee, shall be the initial Operator
-----------------
of the Pipelines and the Facilities.
4.2 Operating Agreement. The party acting as Operator of the Pipelines and
--------------------
the Facilities shall be responsible for and act in accordance with the terms and
provisions of the Contract Operating Agreement attached hereto as Exhibit "C"
(the "Operating Agreement").
9
<PAGE>
5. OPTION TO PURCHASE
5.1. Option to Purchase. POC shall have the following option to purchase
--------------------
the Pipelines, the Facilities and the Easements (the Pipeline Assets) with
closing to occur as set out in Section 7.
5.1.1. POC shall have the option to purchase the Pipeline Assets at the end
of the tenth (10th) Lease Year, upon 180 days prior written notice. At Closing,
POC shall pay to CPSC the sum of two million five hundred thousand dollars
($2,500,000.00) as consideration for the Pipeline Assets.
5.1.2. If POC has not previously exercised its option to purchase, POC shall
have the option to purchase the Pipeline Assets with closing of such purchase
transaction to take place on or before at the end of the fifteenth (15th) Lease
Year, upon 180 days prior written notice At Closing, POC shall pay to CPSC the
sum of Fifty Thousand Dollars ($50,000.00) as consideration for the Pipeline
Assets.
5.2. Option Price. In the event POC exercises its option to purchase, the
-------------
sum set forth in the applicable clause of Section 5.1 as the consideration for
the Pipeline Assets shall be the "Option Price" as used herein.
5.3. Environmental Due Diligence. At any time prior to POC exercising its
------------------------------
option to purchase, POC shall have access to the Pipeline Assets and all
associated records for the purpose of monitoring and assessing the environmental
condition of the Pipeline Assets. Such monitoring and assessment may include
not only a review of records and documents, but an assessment of the real and
personal property associated with the Pipeline Facilities including but not
limited to taking core samples and other samples for analysis.
6. REPRESENTATIONS AND WARRANTIES; COVENANTS
6.1. Representations and Warranties of CPSC. CPSC represents and warrants
----------------------------------------
to POC:
6.1.1. that the execution, delivery and performance of this Agreement and
the transactions contemplated hereby have been duly and validly authorized by
all requisite corporate action on the part of CPSC; and
10
<PAGE>
6.1.2. that CPSC is a Texas corporation and has all requisite power and
authority to enter into this Agreement and consummate the transactions
contemplated hereby; and
6.1.3. that this Agreement constitutes the valid and legally binding
obligation of CPSC, and the taking by CPSC of the actions contemplated hereby do
not and will not violate or constitute a default under any material agreement,
order, law, statute or regulation or result in the acceleration of any
obligation, deed of trust, or indenture or other encumbrance to which CPSC is a
party; and
6.1.4. that CPSC, or its designee, is duly qualified to own and to operate
the Pipeline Assets.
6.2. Covenants of CPSC. CPSC covenants that CPSC will acquire and maintain
------------------
all permits required by CPSC to own and operate the Pipelines and Facilities.
6.3. Representations and Warranties of POC. POC represents and warrants to
--------------------------------------
CPSC:
6.3.1. that the execution, delivery and performance of this Agreement and
the transactions contemplated hereby have been duly and validly authorized by
all requisite corporate action on the part of POC; and
6.3.2. that POC is a Delaware corporation duly organized, validly existing,
and in good standing under the laws of the States of Delaware and Texas, and has
all requisite corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby; and
6.3.3. that this Agreement constitutes the valid and legally binding
obligation of POC, and the taking by POC of the actions contemplated hereby do
not and will not violate or constitute a default under any material agreement,
order, law, statute or regulation; and
6.3.4. POC has granted to CPSC that all agreements and assets (except for
accounts receivable and inventory) used as security for this lease, a first and
superior lien to all other creditors and parties. If existing liens are in
place, the current lienholders have subordinated the liens to CPSC.
7. CLOSING UNDER OPTION TO PURCHASE
11
<PAGE>
7.1. Closing. If POC exercises its option to purchase in a timely and
-------
proper manner, POC and CPSC agree that the consummation of the sale and purchase
of the Pipeline Assets ("Closing") shall occur at a mutually agreed upon date at
the end of the Lease Year for which POC exercised its option (i.e., the 10th, or
15th Lease Year, as applicable) ("Closing Date"). The Closing shall be held at
the offices of CPSC at Two Allen Center, Suite 2250, Houston, Texas.
7.1.1. Closing Obligations. At the Closing, the following events shall
--------------------
occur, each event under the control of one party hereto being a condition
precedent to the events under the control of the other party, and each event
shall be deemed to have occurred simultaneously with the other events:
CPSC shall duly execute, acknowledge and deliver an Assignment and Bill of Sale
("Assignment"), substantially in the form set forth in Exhibit "E" attached
hereto and made a part hereof;
7.1.2. If POC has not previously done so, POC shall pay to CPSC an amount
equal to the total Option Price in immediately available funds by wire transfer
to CPSC's account at Bank One Texas, N.A.-Houston, Texas, ABA Routing No.
111-000-614 Account No. 182-413-6335 for credit to CPSC; and
7.1.3. CPSC shall transfer and deliver or cause to be transferred and
delivered to POC the original (or if an original is not available, then a true
copy) of all relevant written instruments, documents and files, or relevant
portions thereof, pertaining to the Pipeline Assets which are within the
possession or control of CPSC (other than the construction contract and material
dealing with matters between CPSC and the contractor).
8. OBLIGATIONS AFTER CLOSING; DISCLAIMER OF WARRANTIES
8.1. Indemnification of CPSC after Closing. If Closing occurs, POC shall
----------------------------------------
indemnify and hold harmless CPSC and its affiliates, and all their contractors,
officers, agents and employees from and against all damages, demands,
liabilities, losses, lawsuits (including, without limitation, court costs and
reasonable attorneys' fees), costs, claims and causes of action (collectively
referred to in this Section 8.1 as "Claims") that arise out of or in connection
with any errors, defects or deficiencies in the engineering, the design or the
construction of the Pipelines and Facilities (including the Specifications) or
the condition of the Pipeline Assets, or that arise out of or in connection with
the ownership, operation, maintenance, repair or replacement of the Pipeline
Assets after the Closing, regardless of whether such Claims are caused by or
contributed to by the negligence of CPSC (but not the gross negligence or
willful misconduct of CPSC). THE PARTIES EXPRESSLY INTEND THAT THE INDEMNITY
PROVIDED IN THIS SECTION 8.1 INCLUDES THE OBLIGATION OF POC TO INDEMNIFY AND
PROTECT CPSC FROM THE CONSEQUENCES OF CPSC's OWN NEGLIGENCE, WHETHER THAT
NEGLIGENCE IS THE SOLE OR A CONCURRING CAUSE OF THE INJURY, DEATH OR DAMAGE.
12
<PAGE>
8.2. DISCLAIMERS OF WARRANTIES; WAIVERS. THE PARTIES AGREE THAT, TO THE
-------------------------------------
EXTENT REQUIRED TO BE OPERATIVE, THE FOLLOWING DISCLAIMERS OF WARRANTIES ARE
"CONSPICUOUS" DISCLAIMERS FOR THE PURPOSES OF APPLICABLE LAW. THIS AGREEMENT IS
MADE AND ACCEPTED, AND IF POC EXERCISES ITS OPTION TO PURCHASE THE ASSIGNMENT
WILL BE MADE AND ACCEPTED, WITH THE UNDERSTANDING AND AGREEMENT OF THE PARTIES
THAT IF POC EXERCISES ITS OPTION TO PURCHASE, THE PIPELINE ASSETS AND ALL
PERSONAL PROPERTY, MACHINERY, FIXTURES, EQUIPMENT AND MATERIALS COVERED HEREBY
SHALL BE SOLD AND ASSIGNED AND ACCEPTED BY POC IN THEIR CONDITION AT THAT TIME,
"AS IS, WHERE IS, AND WITH ALL FAULTS" AT THAT TIME, WITHOUT ANY WARRANTIES
WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, OF QUALITY, CONDITION,
MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE OR USE, OR DESIGN,
PERFORMANCE, CONDITION, OR OF ANY OTHER KIND, ALL OF WHICH ARE EXPRESSLY
DISCLAIMED; PROVIDED, HOWEVER, CPSC WARRANTS THAT THE PIPELINE FACILITIES ARE IN
GOOD OPERATING ORDER AND WHILE CPSC WAS OPERATOR PIPELINE FACILITIES WERE
OPERATED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS AND THAT THE
FOREGOING DISCLAIMERS DO NOT NEGATE OR DETRACT IN ANY WAY FROM ANY WARRANTIES TO
BE SET FORTH IN THE ASSIGNMENT. POC EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER
XVII, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION
17.555, WHICH IS NOT WAIVED), TEXAS BUSINESS AND COMMERCE CODE (THE "DECEPTIVE
TRADE PRACTICES-CONSUMER PROTECTION ACT").
9. TAXES
9.1. Sales Taxes. If the option to purchase provided for in Section 5.1
------------
is exercised, the Option Price provided for in Section 5.2 shall not include
(and POC shall not otherwise pay CPSC for) any sales or use tax or other excise
taxes, fees or levies. However, in the event that a taxing authority(ies) deems
any such tax, fee or levy to arise out of or in connection with the exercise of
the option to purchase under Section 5.1, POC shall be responsible for payment
thereof and shall indemnify and hold CPSC harmless with respect to the payment
of any such taxes, fees or levies. The Parties agree that, under no
circumstance (other than challenge by a taxing authority) shall any sales or use
tax, other excise tax, fees or levies be due prior to exercise of the option to
purchase.
13
<PAGE>
9.2. Other Taxes and Fees. If the option to purchase provided for in
-----------------------
Section 5.1 is exercised, proration of ad valorem taxes, water taxes, hazardous
waste taxes, utility and fuel charges, permit and inspection fees, and any other
taxes levied on or with respect to the Pipeline Assets (other than taxes covered
in Section 9.1 above) shall be made as of the Closing Date specified in Section
7, with all such items attributable to the period prior the Closing Date to be
for the sole account of CPSC, and all such items attributable to the period on
or after the Closing Date to be for the sole account of POC.
9.3. Cooperation. Each Party shall provide the other party with
-----------
reasonable access to all relevant documents, data and other information which
may be required by the other Party for the purpose of preparing tax returns and
responding to any audit by any taxing jurisdiction. Each Party shall cooperate
with all reasonable requests of the other Party made in connection with
determining or contesting tax liabilities attributable to the Pipeline Assets.
Notwithstanding anything to the contrary contained in this Agreement, neither
Party to this Agreement shall be required at any time to disclose to the other
Party any tax returns or other confidential tax information.
10. MISCELLANEOUS
10.1. Commissions. Whether or not the Closing occurs, (a) CPSC shall
-----------
indemnify and hold harmless POC from and against any and all liability for any
brokers' of finders' fees arising with respect to any brokers or finders
retained or engaged by CPSC in respect to the transactions contemplated by this
Agreement, and (b) POC shall indemnify and hold harmless CPSC from and against
any and all liability for any brokers' or finders' fees arising with respect to
any brokers or finders retained or engaged by POC in respect to the transactions
contemplated by this Agreement.
10.2. Fees. Each Party hereto shall bear and be responsible for all fees,
----
costs and expenses (including, without limitation, legal, accounting and
engineering expenses) incurred by such party with respect to the negotiation and
execution of this Agreement.
14
<PAGE>
10.3. Notices. All notices, requests, demands, instructions and other
-------
communications required or permitted to be given hereunder shall be in writing
and shall be delivered personally, by messenger or mail courier service with
receipt obtained thereby or mailed by registered mail, or certified mail, return
receipt requested, postage prepaid, as follows:
If to POC, addressed to:
PENN OCTANE CORPORATION
900 Veterans Blvd., Suite 240
Redwood City, CA 94063
Attention: Mr. Jerome B. Richter
If to CPSC, addressed to:
CPSC INTERNATIONAL
Two Allen Center, Suite 2250
1200 Smith Street
Houston, Texas 77002
Attention: Mr. A. C. DuBose
or to such other place as either party may designate as to itself by written
notice to the other. All notices will be deemed given on the date of receipt at
the appropriate address.
10.4. Force Majeure. A Party shall be excused from complying with the terms
-------------
of this Agreement, except the payment term, if and for so long as such
compliance is hindered, prevented or made unsafe by strikes or other labor
disturbances, riots, wars (declared or undeclared), insurrection, rebellions,
terrorist acts, civil disturbances, dispositions, acts of God, inability to
obtain equipment, supplies or fuel, epidemics, lightning, earthquakes, fires,
storms, hurricanes, floods, washouts, breakage or accident to machinery,
equipment or lines of pipe, freeze-ups of lines of pipe or equipment, the
necessity to make repairs or tests to lines of pipe or equipment, laws, rules,
regulations, dispositions or orders of governmental entities, agencies, or
authorities, or by other act or cause, whether similar or dissimilar, which is
reasonably beyond the control of such Party, such causes being herein sometimes
called "Force Majeure." If any failure to comply with this Contract is
occasioned by a governmental law, rule, regulation, disposition, or order and
the affected Party is operating in accordance with accepted practice in the area
of operations and is making reasonable effort to comply with such law, rule,
regulation, disposition, or order, the matter shall be deemed beyond the control
of the affected Party. In the event that either Party hereto is rendered
unable, wholly or in part, by any of these causes to carry out its obligations
under this Contract, it is agreed that such Party shall give notice and details
of such occurrence of Force Majeure in writing to the other Party as promptly as
possible after its occurrence. In such cases, such obligations of the Party
giving the notice shall be suspended during the continuance of any inability so
caused.
15
<PAGE>
10.5. Governing Law. THIS AGREEMENT IS TO BE CONSTRUED IN ACCORDANCE WITH
--------------
THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICT OF LAWS. IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES, THEY SHALL
USE THEIR BEST EFFORTS TO MUTUALLY AGREE UPON AN ALTERNATIVE FORM OF DISPUTE
RESOLUTION ("ADR") BEFORE AN ADR PANEL OR ADR INDIVIDUAL IN HOUSTON, TEXAS; ANY
JUDGMENT ENTERED THEREUPON SHALL BE FILED ONLY IN THE STATE OR FEDERAL COURTS OF
TEXAS. IN THE EVENT OF (a) FAILURE TO AGREE ON ADR METHOD, (b) FAILURE TO
CONSENT TO A NON-BINDING ADR DECISION, OR (c) APPEAL OF, OR CHALLENGE TO, AN ADR
DECISION, THEN ANY LEGAL ACTIONS FILED MAY BE BROUGHT ONLY IN THE STATE OR
FEDERAL COURTS AT HOUSTON, TEXAS.
10.6. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors of the Parties, but shall not be assigned by either
Party and if assignment is attempted it shall be null and void without the prior
written consent of the other Party, which consent shall not unreasonably be
withheld, except that assignment to a parent corporation, subsidiary of a parent
corporation, or a successor to substantially all of the business of the Parties
shall not require the other Party's consent to become effective. In any
assignment the Assignor shall guarantee the full performance of the terms and
conditions of this Agreement by the Assignee.
10.7. Entire Agreement; Amendments. This Agreement shall constitute the
------------------------------
entire agreement between the Parties with respect to the subject matter hereof,
superseding any and all prior negotiations, discussions, agreements and
understandings, whether oral or written, relating to such subject matter. This
Agreement may not be amended, and no rights hereunder may be waived, except by a
written document signed by the Party to be charged with such amendment or
waiver.
10.8. Severability. If any one or more of the provisions contained in this
-------------
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement.
10.9. No Consequential or Punitive Damages. In the event of breach or
----------------------------------------
violation of this Agreement, neither Party shall be entitled to recover
consequential or punitive damages from the other Party, and each Party hereby
waives any claim or right to consequential or punitive damages hereunder.
16
<PAGE>
10.10. Headings; References. The headings of the articles and sections of
---------------------
this Agreement are for guidance and convenience of reference only and shall not
limit or otherwise affect any of the terms or provisions of this Agreement.
References herein to an "Article" or a "Section" or an "Exhibit" shall be to an
Article or a Section or an Exhibit of this Agreement unless a contrary intent is
clearly stated.
10.11. Counterparts. This Agreement may be executed by POC and CPSC in any
------------
number of counterparts, each of which shall be deemed an original instrument,
but all of which together shall constitute but one and the same instrument.
10.12. Recording Fees. POC shall pay all recording fees relating to the
---------------
filing of instruments transferring title from CPSC to POC.
10.13. Conflict. In the event of any conflict or inconsistency between the
--------
Specifications and the terms and provisions of this Agreement, the terms and
provisions of this Agreement shall prevail and govern.
10.14. Publicity. All notices to third parties and other publicity
---------
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between POC and CPSC; provided, however, no such
notices or other publicity shall disclose the Option Price of the Pipeline
Assets, except as required by law. No Party shall act unilaterally in this
regard without the prior written approval of the other, unless required by law.
10.15. Waiver. No waiver of any term, provision or condition of this
------
Agreement shall be effective unless in writing signed by the parties hereto, and
no such waiver shall be deemed to be or construed as a further or continuing
waiver of any such term, provision or condition or as a waiver of any other
term, provision or condition of this Agreement, unless specifically so stated in
such written waiver.
10.16. Facsimile. Facsimile copies of all documents required for Closing
---------
hereunder, including signatures thereon, shall constitute original copies
thereof and shall be binding on the parties hereto. POC and CPSC will, within
five (5) working days of the Closing Date, send to the other an original of all
documents executed by the parties hereto for Closing.
10.17. First Right of Refusal. If CPSC desires to sell this lease to a
-------------------------
non-affiliated third party, CPSC shall notify POC of CPSC's offer and give POC
ten (10) days to make a firm and binding offer with proof of financing to
purchase this lease which is equivalent to or better than the offer to purchase
that CPSC has presented to POC. If POC fails to make a binding offer as stated
above within ten (10) days of receipt of CPSC's offer, then in that event, CPSC
shall have the right to proceed with the sale of the lease to a third party.
17
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have executed this Agreement
as of the date first above written. POC is executing this Agreement subject to
POC's Board of Directors' approval. Said approval will be confirmed by letter
from Jerome Richter to CPSC.
CPSC: POC:
CPSC INTERNATIONAL PENN OCTANE CORPORATION
By: By:
----------------------- -----------------------
Name: Eric B. DuBose Name:
----------------------- -----------------------
Title: President Title:
----------------------- -----------------------
18
<PAGE>
EXHIBIT "A"
DESIGN AND SPECIFICATIONS
CPSC INTERNATIONAL (CPSC) will construct, own and operate two (2) new (1 -
8.625" & 1 - 6.625") pipelines for PENN OCTANE CORPORATION (POC) from POC's LPG
terminal in Brownsville, Texas to a prescribed location on the Mexican side of
the Rio Grande River west of Matamoros, Tamaulipas, Mexico.
All of the design and construction of the proposed pipelines will be in
accordance with the DOT CFR Title 49 Part 195, "Transportation of LPG Gas by
Pipelines"; ANSI B31.8, "Gas Transportation Piping Systems", AI 1104, "Standard
for Welding Pipelines and Related Facilities", CFR Title 29 Part 1910,
"Occupational Safety and Health Standards (OSHA)", and applicable Pipeline
Standard Specifications and Engineering Standards. All design will be to ANSI
600 and all facilities will be hydrostatically tested to 1800 psig.
A - 1
<PAGE>
EXHIBIT "B"
OPERATING REQUIREMENTS
General Description
- --------------------
CPSC INTERNATIONAL (CPSC) will construct, own and operate two (2) new (1 -
8.625" & 1 - 6.625") pipelines for PENN OCTANE CORPORATION (POC) from POC's LPG
terminal in Brownsville, Texas to a prescribed location on the Mexican side of
the Rio Grande River west of Matamoros, Tamaulipas, Mexico.
Scope - General Design Criteria
- -----------------------------------
All of the design and construction of the proposed pipelines will be in
accordance with the DOT CFR Title 49 Part 195, "Transportation of LPG Gas by
Pipelines"; ANSI B31.8, "Gas Transportation Piping Systems", AI 1104, "Standard
for Welding Pipelines and Related Facilities"; CFR Title 29 Part 1910,
"Occupational Safety and Health Standards (OSHA)"; and applicable Pipelines
Standard Specifications and Engineering Standards. All design will be to ANSI
600 and all facilities will be hydrostatically tested to 1800 psig unless
directed otherwise by POC.
Schedule
- --------
CPSC will commence the described activities as outlined in the contract
immediately upon execution of the contract in order to meet the substantial
completion date of May 1, 1999.
Project Services
- -----------------
In accordance and as per the terms of the contract CPSC will provide and be
responsible for the following:
- - Final Route Selection
- - Engineering Design per Function code Specifications for LPG Pipelines
- - Project Management and Material Procurement
- - Construction
- - 100% X-Ray
- - Hydrostatically tested, dried and cleaned to -0 F.
- - Inspection
- - Cathodic protection
B - 1
<PAGE>
- - Capital funding (interim/long term)
- - Construction Insurance
- - Operation and maintenance
In accordance and as per the terms of the contract POC will be responsible for:
- - Sales Tax on product sale.
B - 2
<PAGE>
EXHIBIT "C"
CONTRACT OPERATING AGREEMENT
THIS CONTRACT OPERATING AGREEMENT ("Operating Agreement") is made and entered
into as of the ___ day of __________, 1998, by and between CPSC INTERNATIONAL
("CPSC" or "Operator"), a Texas corporation, and PENN OCTANE CORP. ("POC"), a
________________ corporation (hereinafter referred to collectively as the
"Parties" and individually as a "Party" where either POC or CPSC could apply).
WHEREAS, CPSC is the owner of the "Pipelines" hereinafter described and
concurrent CPSC and POC shall enter into an Agreement for lease of the Pipelines
to POC under the terms of the Installment Purchase Agreement, hereinafter
described; and pursuant to the Installment Purchase Agreement, CPSC has agreed
to operate the Pipelines on a contract basis in accordance with the terms,
conditions and provisions of this Operating Agreement; and
WHEREAS, POC may take over operatorship of the Pipelines at some time in the
future; and
WHEREAS, throughout this Exhibit the reference to Operator will refer to CPSC;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree as follows:
I. SCOPE OF OPERATING AGREEMENT
1.1 General. This Operating Agreement is entered into pursuant to the terms
-------
of the Lease Installment Purchase Agreement for two (2) 18-mile Pipelines
("Installment Purchase Agreement") between POC and CPSC dated ______ ___, 1998.
All capitalized terms used in this Operating Agreement which are defined in the
Installment Purchase Agreement shall have the respective meanings assigned to
such terms in the Installment Purchase Agreement; and, as used herein, the term
"Pipeline Facilities" shall include the Pipelines and the Facilities. The
effective date of this Operating Agreement ("Effective Date") is the same date
as the Lease Effective Date. Under the terms, conditions and provisions of this
Operating Agreement, Operator agrees to furnish all expertise, services,
materials, equipment, supplies and labor for the operation of the Pipeline
Facilities and routine maintenance thereof, as described in Exhibit "A"
("Operations and Routine Maintenance").
1.2 Operator. CPSC shall serve as the operator of the Pipelines and
--------
Facilities ("Operator") pursuant to the terms of this Operating Agreement and
subject to the terms of the Installment Purchase Agreement. In accordance with
this Operating Agreement, Operator shall perform Operations and Routine
Maintenance for and on behalf of POC and in POC's name; and POC hereby
constitutes and appoints Operator the agent and attorney in fact for POC, hereby
authorizing and empowering Operator in the name and on behalf of POC to do and
perform any and all acts that Operator shall, in the exercise of its sole
judgment deem or find necessary, requisite, or proper for the efficient
performance of Operations and Routine Maintenance, subject to the limitations
contained in this Operating Agreement.
C - 1
<PAGE>
1.3 Independent Contractor Relationship. The relationship of Operator to
-------------------------------------
POC shall be that of an independent contractor, Operator not being subject to
the control or direction of POC, and POC being interested only in the results to
be obtained. All employees shall be the employees of Operator, and not of POC.
Hours of work, compensation of employees, and similar matters shall be within
the discretion of Operator.
1.4 Performance. Operator shall have full control of the Pipeline
-----------
Facilities and the operation thereof as permitted and required by, and within
-
the limits of, this Operating Agreement. Operator shall conduct all its
activities under this Operating Agreement in accordance with applicable laws and
regulations and industry standards, and in a good and workmanlike manner.
II. RESPONSIBILITIES OF OPERATOR
2.1 General Responsibilities of Operator. Subject to the terms and
---------------------------------------
provisions of this Operating Agreement, Operator shall, at Operator's expense,
operate and perform maintenance of the Pipeline Assets as described in Schedule
A.
2.2 Normal Operations. It is contemplated that normal operations will
------------------
include operating the Pipelines for the transportation of Liquid Petroleum Gas
(LPG) to the Pipelines' terminus at POC's Brownsville Terminal. POC shall
communicate fully with Operator regarding operations. Operator shall use all
reasonable efforts to make and to implement operating decisions that will
minimize any adverse effect on the transmission of LPG through the Pipelines.
If the implementation of an operational decision during a non-emergency
situation could reasonably be anticipated to impair the transmission of LPG
through the Pipelines at the rate such LPG is scheduled to be taken, Operator
shall use all reasonable efforts to give POC twenty-four (24) hours prior notice
of any such decision.
2.3 Emergencies. Notwithstanding any other provision of this Operating
-----------
Agreement, in case of explosion, fire, flood, extreme cold, freezing or other
sudden emergency, or sudden major interruption of the operation of the Pipeline
Facilities, or any part thereof, Operator shall notify POC as soon as possible
and communicate Operator's recommendation for protective, remedial and other
actions, but where the situation does not permit time for obtaining POC's
specific approval, the prior approval of POC shall not be a prerequisite to
Operator's taking such steps and incurring such costs as, in Operator's
judgment, are required to deal with such emergency or interruption or to
safeguard life and/or property in such event; provided, however, that Operator
shall, as promptly as possible, report such emergency or interruption to POC and
endeavor to secure from POC authorization required for any further action or
expenditure. Operator shall also promptly make any required reports of such
emergency or interruption to federal, state or local regulatory authorities
having jurisdiction.
C - 2
<PAGE>
2.4 Records and Reports. Operator shall retain all records, books of
---------------------
account, reports and other documents related to the operation and maintenance of
the Pipelines for a period of two (2) years from the date of completion of the
activity to which such records relate, or such longer period as specified by law
in the case of those records which by government regulations must be retained
for a longer period of time.
2.5 Employees, Consultants and Subcontractors.
--------------------------------------------
2.5.1 All personnel engaged or directed by Operator in the performance of
Operator's duties and obligations under this Operating Agreement and all
contractors (and their subcontractors) and consultants retained by Operator
shall be duly qualified and experienced to perform such duties and obligations.
Operator shall use all reasonable efforts to require such Persons to comply with
all relevant laws, statutes, ordinances, safety codes, regulations and rules of
governmental authorities applicable to the Pipelines.
2.5.2 Operator shall maintain and shall require all contractors (and their
subcontractors) performing services in connection with the Pipelines to maintain
in force and effect Worker's Compensation insurance coverage as required by the
laws of Texas.
2.5.3 Operator shall implement and enforce an appropriate safety program and
shall use its best efforts to cause all employees, contractors, subcontractors,
consultants, vendors and suppliers to perform their services in a safe, sound,
workmanlike and prudent manner, in accordance with industry practices and
applicable laws, rules, regulations and safety codes.
III. PAYMENTS AND RELATED MATTERS
3.1 Monthly Statements. For informational purposes only, on a monthly
-------------------
basis, Operator shall prepare and deliver to POC a written itemization of all
expenditures for labor, material, Subcontractors' fees and other costs incurred
by Operator in connection with Repair, Replacement and Maintenance expenses.
C - 3
<PAGE>
3.2 Account Books. Operator shall maintain records of costs, expenses and
--------------
expenditures incurred in performing any of its obligations under this Operating
Agreement, so as to provide POC with the information required for accounting,
regulatory, tax (including federal, state and local), insurance, financing, and
other reasonable purposes.
3.3 Review of Records. POC shall have the right at all reasonable times
-------------------
during ordinary business hours to examine and make copies of the books of
account and records maintained by Operator regarding the Pipelines, including
the records maintained pursuant to Sections 2 and 3 of this Operating Agreement.
Such right may be exercised through an agent or employee designated in writing,
or by an independent accountant or attorney so designated. POC shall bear all
expenses incurred in connection with any such inspection, examination or
copying.
3.4 Access. Operator shall permit POC, at POC's risk, full and free access
------
to the Pipeline Facilities at all reasonable times.
VI. TERM
4.1 Term. This Operating Agreement shall become effective as of the
----
Effective Date and shall continue in force and effect for a period of fifteen
(15) years, and from year to year thereafter until terminated in accordance with
the said Installment Purchase Agreement.
4.2 Termination by POC. This Operating Agreement may be terminated at any
--------------------
time by POC (i) in the event Operator violates any safety standard or code and
does not remedy such situation within thirty (30) days after notice, or (ii) in
the event Operator breaches any other provision hereof or fails or refuses to
timely perform any of its duties hereunder and fails or refuses to cure such
deficiency or default within thirty (30) days after receipt of notice of such
default by POC. If Operator becomes insolvent, bankrupt or is placed in
receivership, it shall be deemed to have resigned as Operator, and this
Operating Agreement shall terminate. If a petition for relief under the federal
bankruptcy laws is filed by or against Operator, and the removal of Operator
and/or the termination of this Operating Agreement is prevented by the federal
bankruptcy court, then at POC's option, POC, Operator and a third Party selected
by POC shall comprise an interim operating committee to serve until Operator has
elected to reject or to assume this Operating Agreement, and all actions shall
require the agreement of two (2) members of the operating committee.
C - 4
<PAGE>
4.3 Effect. Termination of this Operating Agreement shall not relieve
------
either Party of any obligation or liability on account of obligations accruing
or conduct or events occurring prior to the date of such termination.
EXECUTED as of the date first above written.
CPSC INTERNATIONAL PENN OCTANE CORPORATION
By: _________________________ By: _________________________
Printed Name: Eric B. DuBose Printed Name: ________________
----------------
Title: President Title: ________________________
---------
C - 5
<PAGE>
Schedule A
(of Operating Agreement)
_______________________________
SERVICES PROVIDED:
1. Operator will provide the following documentation services:
- - Document maintenance activities and inspections for the activities listed
in items 2 through 4 below as necessary to comply with existing Department of
Transportation (DOT) and Texas Railroad Commission (TRC) requirements and OSHA.
2. Operator will provide the following operating and engineering services:
- - Maintain and update as needed all drawings and alignment maps. (DOT/TRC)
- - Perform 24 hour pipeline surveillance via SCADA or similar monitoring
equipment.
3. Open/shut appropriate valves to start/end all deliveries that require
manual operations and coordinate all such activity with the appropriate POC
personnel.
- - Inspect corrosion coupons and/or test spool pieces, change them when, in
operator's judgement it is necessary, and report findings to POC semiannually or
more frequently if in operator's judgment circumstances warrant. (DOT/TRC)
- - Perform annual cathodic protection surveys. (DOT/TRC)
- - Review operating and maintenance manuals annually. (DOT/TRC)
4. Operator will provide the following measurement services:
- - Prove each meter up to once per three (3) month for the purpose of
assuring accurate measurement or as reasonably requested by POC to ensure
accurate measurement.
- - Identify volume discrepancies in a timely manner.
- - Provide daily and monthly summary of measurement figures into and out of
the pipeline to the appropriate POC personnel.
C - 6
<PAGE>
- - Calibrate instrumentation semiannually and inspect relief valves
semiannually. (DOT/TRC)
5. Operator will provide only the following routine maintenance services:
- - Perform ROW patrols as required by existing regulation. (DOT/TRC)
- - Perform ROW maintenance (mowing, clearing, and replacing and painting
markers, vents and fence posts). (DOT/TRC)
- - Inspect fire extinguishers monthly. (OSHA)
- - Provide inspection during foreign construction activities and respond to
"one-calls".
- - Inspect mainline block valves semiannually. (DOT/TRC)
- - Perform annual gas line leak survey. (DOT/TRC)
- - Inspect above ground piping and spans every five (5) years. (TRC)
6. Operator will provide the following Scheduling and Control Room Operating
services:
- - Schedule the pipeline transportation service to meet whenever feasible
POC's operational requirements in a safe and efficient manner.
- - Provide twenty-four (24) hour Control Center coverage including
maintaining the on-line computer system.
C - 7
<PAGE>
EXHIBIT "D"
CERTIFICATE OF SUBSTANTIAL COMPLETION
REFERENCE for all purposes is hereby made to that certain Lease/Installment
Purchase Agreement ("Agreement") for two (2) 18-mile Pipelines dated
____________ _____, 1998, between PENN OCTANE CORPORATION ("POC") and CPSC
INTERNATIONAL ("CPSC"). Capitalized terms which are defined in the Agreement
are used in this Certificate with the same meaning.
Pursuant to the terms of Section 3.6. of the Agreement, POC and CPSC agree,
certify, and acknowledge as follows:
(1) Substantial Completion date occurred on, ____, 199.
(2) The Lease Effective Date is, 199__.
(3) The Pipelines and the Facilities are leased to POC under the terms
of the Agreement effective as of the Lease Effective Date.
(4) The Lease Term commenced on the Lease Effective Date and will end
on _________, 20___ , unless and until the option to purchase provided for in
Article V is exercised, in which case the Lease Term shall end at the end of the
Lease Year for which POC exercises its option (i.e., the 10th, or 15th Lease
Year, as applicable).
(5) The Operating Agreement became effective on the Lease Effective Date.
EXECUTED this day of, 199.
PENN OCTANE CORPORATION
By: _______________________________________
CPSC INTERNATIONAL
By: _______________________________________
D - 1
<PAGE>
EXHIBIT "E"
ASSIGNMENT AND BILL OF SALE
This ASSIGNMENT AND BILL OF SALE ("Assignment") is made and entered into by
and between CPSC INTERNATIONAL, a Texas corporation, with an office at Two Allen
Center, Suite 2250, 1200 Smith Street, Houston, Texas 77002 ("Assignor"), and
PENN OCTANE CORPORATION, a ____________ corporation, with an office at
________________________ _________________________________________ ("Assignee"),
pursuant to that certain Installment Purchase Agreement ("Purchase and Sale
Agreement") dated ________, 1998, between Assignor and Assignee.
For and in consideration of the premises and the sum of Ten Dollars and
other valuable consideration, the receipt of which is hereby acknowledged,
Assignor hereby SELLS, TRANSFERS AND ASSIGNS to Assignee all of the following
described property;
(a) Those certain pipelines located in Cameron County, Texas, described in
Exhibit "A" attached hereto, together with all vents, casings, valves, cathodic
protection devices and other property and equipment constructed on, affixed to
or installed on said pipelines (collectively, the "Pipeline Facilities"); and
(b) To the extent of Assignor's ability to transfer the same, all of
Assignor's right, title, and interest in and to the pipelines a right-of-way
easements, licenses, and permits (collectively, the "Easements");
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns.
This Assignment is made by Assignor and accepted by Assignee subject to the
following:
1. This Assignment is made subject to the terms and provisions of the
Purchase and Sale Agreement, to the terms and provisions of the right-of way
easements and licenses in which the Pipeline Facilities are located, and to the
following, to the extent the same are valid and subsisting and pertain to the
Pipeline Facilities and the Easements in which they are located: any and all
restrictions, covenants, conditions, easements, licenses, leases and other
matters of record in the public records of Cameron County, Texas, and zoning
laws, regulations and ordinances of municipal and other governmental
authorities.
2. Assignor hereby binds Assignor and its successors to warrant and forever
defend all and singular the title to the Pipeline Facilities, subject as
aforesaid, unto Assignee, its successors and assigns, against the claims of all
persons lawfully claiming or to claim the same or any part thereof by, through
or under Assignor, but not otherwise.
E - 1
<PAGE>
3. THE PIPELINE FACILITIES ARE SOLD AND ASSIGNED AND ACCEPTED BY ASSIGNEE
"AS IS, WHERE IS," AND IN THEIR PRESENT CONDITION, AND "WITH ALL FAULTS,"
WITHOUT ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, OF QUALITY,
CONDITION, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE OR USE,
DESIGN, PERFORMANCE, CONDITION, OR OF ANY OTHER KIND, ALL OF WHICH ARE EXPRESSLY
DISCLAIMED; PROVIDED, HOWEVER ASSIGNOR WARRANTS THAT THE PIPELINE FACILITIES ARE
IN GOOD OPERATING ORDER AND THAT WHILE ASSIGNEE WAS OPERATOR UNDER THE OPERATING
AGREEMENT THE PIPELINE FACILITIES WERE OPERATED IN ACCORDANCE WITH ALL
APPLICABLE LAWS AND REGULATIONS AND THAT THE FOREGOING DISCLAIMERS DO NOT NEGATE
OR DETRACT IN ANY WAY FROM ANY WARRANTIES SET FORTH IN PARAGRAPH 2 OF THIS
ASSIGNMENT. ASSIGNEE EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER XVII,
SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION
17.555, WHICH IS NOT WAIVED), TEXAS BUSINESS AND COMMERCE CODE (THE "DECEPTIVE
TRADE PRACTICES--CONSUMER PROTECTION ACT").
EXECUTED THIS THE _____ DAY OF ________________.
CPSC INTERNATIONAL
By:
----------------------------
Eric B. DuBose, President
E - 2
<PAGE>
EXHIBIT "F"
ESCROW AGRREMENT
AGREEMENT made as of this ________day of _________________, 19__, by and between
__________________________________, a____________________ corporation
("___________") and _________________________________ ________________ Bank as
escrow agent (the "Escrow Agent").
WITNESSETH:
WHEREAS,
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, the parties hereto agrees as follows:
1. Acceptance by Escrow Agent
-----------------------------
The Escrow Agent hereby accepts the appointment as escrow agent hereunder and
agrees to act on the terms and conditions hereinafter set forth.
2. Investment of Escrow Fund
----------------------------
The Escrow Agent shall invest the Escrow Fund, upon the express written
direction of _______________________________, in one or more of the following
investments:
3. Rights and Responsibilities of Escrow Agent
------------------------------------------------
The acceptance by the Escrow Agent of its duties hereunder is subject to the
following terms and conditions, which the parties to this Agreement hereby shall
govern and control with respect to the Escrow Agent's rights, duties,
liabilities and immunities.
(a) The Escrow Agent shall act hereunder as a depository only, and it shall
not be responsible or liable in any manner whatever for the sufficiency,
correctness, genuineness or validity of any document furnished to the Escrow
agent or any asset deposited with it.
(b) The Escrow Agent shall be protected in acting upon written instructions
from _____________________ if it, in good faith, believes such written
instructions to be genuine and what it purports to be.
__________________shall from time to time file with the Escrow Agent a certified
copy of each resolution of its Board of Directors authorizing the person or
persons to give written instructions. Such resolution shall specify the class of
instructions that may be given by each person to the Escrow Agent, under this
Agreement, together with certified signatures of such persons authorized to
sign. This shall constitute conclusive evidence of the authority of the
signatories designated therein to act. It shall be considered in full force and
effect with the Escrow Agent fully protected in acting in reliance thereon
unless and until it receives written notice to the contrary.
F - 1
<PAGE>
(c) The Escrow Agent shall not be liable for any error of judgment or for
any action taken or omitted by it in good faith, or for any mistake of fact or
law, or for anything which it may do or refrain from doing in connection
herewith except its own gross negligence or willful misconduct.
(d) ____________________and ___________________agree to indemnify the Escrow
Agent and hold it harmless from and against any loss, liability, expenses
(including reasonable attorneys' fees and expenses), claim or demand arising out
of or in connection with the performance of its obligations in accordance with
the provisions of this Escrow Agreement, except for the gross negligence or
willful misconduct of the Escrow Agent. These indemnities shall survive the
resignation of the Escrow Agent or the termination of this Escrow Agreement.
(e) The Escrow Agent shall have no duties except those specifically set
forth in this Agreement. This Agreement represents the entire understanding of
the parties hereto with respect to the subject matter contained herein and
supersedes any and all other and prior agreements between them.
(f) The Escrow Agent shall have the right at any time it deems appropriate
to seek an adjudication in court of competent jurisdiction as to the respective
rights of the parties hereto and shall not be held liable by any party hereto
for any delay or the consequences of any delay occasioned by such resort to
court.
(g) The fee of the Escrow Agent for its services hereunder shall be paid by
________________ in accordance with the standard schedule of charges in effect
when services are rendered. Such schedule will be furnished upon request.
F - 2
<PAGE>
4. Statements
----------
During the term of this Agreement, the Escrow Agent shall provide
_________________________with monthly statements containing the beginning
balance in the escrow account as well as all principal and income transactions
for the statement period. ___________________________ shall be responsible for
reconciling such statements. The Escrow Agent shall be forever released and
discharged from all liability with respect to the accuracy of such statements,
except with respect to any such act or transaction as to which
____________________________shall, within 90 days after the furnishing of the
statement, file written objections with the Escrow Agent.
5. Distributions
-------------
The Escrow Agent shall distribute the Escrow Funds from time to time, in
accordance with the instructions contained in written statements provided to the
Escrow Agent by _________________________________________.
6. Income
------
All income, including interest and dividends, earned on the Escrow Fund
deposited hereunder (hereinafter called the "Income") shall be added to and held
in the Escrow Account created hereunder.
7. Tax Identification Number
---------------------------
All interest accrued in the Escrow Fund shall be for the account of
_________________ and shall be reported under applicable federal regulations
using the tax identification number of ___________________________, which is
#_____________________________.
8. Indemnification as to Taxes, Penalties and Interest
---------------------------------------------------------
____________________ shall indemnify and hold harmless the Escrow Agent against
and in respect of any liability for taxes and for any penalties or interest in
respect of taxes attributable to the investment of funds held in escrow by
Escrow Agent pursuant to this Agreement.
9. Amendment
---------
This Agreement may not be amended or supplemented and no provision hereof may be
modified or waived, except by an instrument in writing, signed by all of the
parties hereto.
F - 3
<PAGE>
10. Termination
-----------
The purpose of this Escrow Agreement and the terms hereof shall terminate on the
earlier of ____________________or _______________________. Upon the termination
of this Agreement and upon the delivery of all or any portion of the Escrow
Funds by the Escrow Agent, in accordance with the terms hereof, the Escrow Agent
shall be relieved of any and all further obligations hereunder.
11. Resignation
-----------
The Escrow Agent may resign at any time by giving thirty (30) days written
notice of such resignation to _____________________________. If no successor
Escrow Agent has been named at the expiration of the thirty (30) day period, the
Escrow Agent shall have no further obligation hereunder except to hold the
Escrow Funds as a depository. Upon notification by __________________ of the
appointment of the successor, the Escrow Agent shall promptly deliver the Escrow
Fund and all materials in its possession relating to the Escrow Fund to such
successor, and the duties of the resigning Escrow Agent shall thereupon in all
respects terminate, and it shall be released and discharged from all further
obligations hereunder. Similarly, the Escrow Agent may be discharged from its
duties as Escrow Agent under this Agreement upon thirty (30) days written notice
from _________________________ and upon payment of any and all fees due to
Escrow Agent. In such event, the Escrow Agent shall be entitled to rely on
instructions from ___________________ as to the disposition and delivery of the
Escrow Fund.
12. Execution
---------
This Agreement may be executed in several counterparts, each of which shall be
deemed an original, but such counterparts together shall constitute one and the
same instrument. The effective date of this Agreement shall be the date it is
executed by the last party to do so.
13. Miscellaneous
-------------
All covenants and agreements contained in this Agreement by or on behalf of the
parties hereto shall bind and inure to the benefit of such parties and their
respective heirs, administrators, legal representatives, successors and assigns,
as the case may be. The headings in this Agreement are for convenience of
reference only and shall neither be considered as part of this Agreement, nor
limit or otherwise affect the meaning hereof. This Agreement shall be construed
and enforced in accordance with the laws of ________________________.
14. Notices
-------
All instructions, notices and other communications hereunder must be in writing
and shall be deemed to have been duly given if delivered by hand or mailed by
first class, registered mail, return receipt requested, postage prepaid, and
addressed as follows:
F - 4
<PAGE>
(a) If to ________________________________________________
(b) If to ________________________________________________
(c) If to the Escrow Agent:
IN WITNESS THEREOF, the parties hereto have duly executed this Agreement as of
the date first above written.
(NAME OF COMPANY)
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
as (ESCROW AGENT)
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
F - 5
<PAGE>
January 7, 1999
Mr. Jerome B. Richter
Chairman of the Board
Penn Octane Corp.
900 Veterans Blvd., Suite 240
Redwood City, CA 94063
REFERENCE: AMENDMENT NO. 1 TO THE LEASE/INSTALLMENT PURCHASE AGREEMENT DATED
NOV. 24, 1998 BY AND BETWEEN PENN OCTANE CORPORATION AND CPSC INTERNATIONAL.
Dear Mr. Richter:
In reference to said Lease/Installment Purchase Agreement dated November
24, 1998, this letter agreement shall serve as Amendment No. 1 and the agreement
shall be amended effective January 1, 1999 as follows:
1. The language in SECTION 1.1.1 (Definitions) shall be deleted in its
entirety and replaced with the following:
1.1.1. "PIPELINES" MEANS THOSE TWO (2) PIPELINES, APPROXIMATELY EIGHTEEN
(18) MILES IN LENGTH AND WITH A NOMINAL 8.625 INCH OUTSIDE DIAMETER (8.625"
O.D.) AND A NOMINAL 625 INCH OUTSIDE DIAMETER (6.625" O.D.) TO BE CONSTRUCTED
IN CAMERON COUNTY, TEXAS, AS MORE PARTICULARLY DESCRIBED IN EXHIBIT "A" ATTACHED
HERETO AND MADE A PART HEREOF.
2. The language in SECTION 3.2 (Rental) shall be deleted in its entirety and
replaced with the following:
3.2. RENTAL. FOR THE DURATION OF THE LEASE TERM (AS HEREIN DEFINED), POC
-------
SHALL PAY TO CPSC AS RENTAL THE SUM OF ONE MILLION SEVENTY-TWO THOUSAND EIGHT
HUNDRED DOLLARS ($1,072,800.00) PER LEASE YEAR (THE "RENTAL"), SUBJECT TO
FOLLOWING PROVISIONS OF THIS SECTION 3.2. THE RENTAL FOR EACH LEASE YEAR IS
PAYABLE IN TWELVE (12) EQUAL MONTHLY INSTALLMENTS OF EIGHTY NINE THOUSAND FOUR
HUNDRED DOLLARS ($89,400.00) EACH, DUE AND PAYABLE ON OR BEFORE THE LAST DAY OF
EACH MONTH PROVIDED, HOWEVER, IF THE SUBSTANTIAL COMPLETION DATE DOES NOT OCCUR
ON THE FIRST DAY OF THE MONTH, THEN SOLELY WITH RESPECT TO THE INSTALLMENT OF
RENTAL PAYABLE OF THE INITIAL MONTH OF THE INITIAL LEASE YEAR. POC SHALL MAKE
AN ENTIRE MONTHLY INSTALLMENT. SUCH PAYMENT SHALL BE CONSIDERED A PREPAYMENT
FOR THE PARTIAL MONTH'S RENTAL AT THE END OF THE LEASE TERM. POC SHALL REQUIRE
ITS CUSTOMER TO MAKE ALL PAYMENTS TO AN ESCROW ACCOUNT IN THE NAME OF CPSC. AN
ESCROW AGENT (RZB) WILL DEDUCT THE LEASE PAYMENT AND ANY OTHER FUNDS DUE CPSC
FROM THE ESCROW ACCOUNT AND REMIT THE REMAINDER TO POC. A SAMPLE ESCROW
AGREEMENT IS ATTACHED AS EXHIBIT "F".
3. The language in SECTION 3.3 (Letter of Credit) shall be deleted in its
entirety and replaced with the following:
<PAGE>
January 7, 1999
Mr. Richter
Page 2 of 2
3.3 LETTER OF CREDIT. POC SHALL PROVIDE, AT CLOSING OF THE
-------------------
LEASE/INSTALLMENT AGREEMENT, AN IRREVOCABLE STANDBY LETTER OF CREDIT TO
GUARANTEE PAYMENTS TO CPSC IN THE AMOUNT OF FIVE HUNDRED THIRTY-FOUR THOUSAND
DOLLARS ($534,000.00). IF THERE IS A DEFAULT IN PAYMENT, CPSC CAN CALL ON THE
LETTER OF CREDIT FOR PAYMENT. THE IRREVOCABLE LETTER OF CREDIT WILL BE OBTAINED
FROM A FIRST RATED BANK ACCEPTABLE TO CPSC.
Except as set forth above, all other terms and conditions of the Agreement
shall remain unchanged and in full force and effect. If the foregoing is
acceptable to you, please indicate your acceptance thereof by signing in the
space provided below and returning both original copies to us. A fully executed
copy will be returned to you for your files.
Submitted by:
CPSC INTERNATIONAL
Accepted by: Accepted by:
CPSC INTERNATIONAL PENN OCTANE CORPORATION
By: ______________________________ By: _______________________________
Title: ___________________________ Title: ____________________________
Date: ____________________________ Date: _____________________________
Acd/presentaion
<PAGE>
January 25, 1999
Mr. Jerry Lockett
Vice President - Gas Liquids
Penn Octane Corporation
1110 Kingwood Dr.
Kingwood, Tx. 77339
Reference: Agreed Amendment
Rental Adjustment
(Mexican Side)
Dear Mr. Lockett:
Penn Octane Corporation (POC) and CPSC International (CPSC) have agreed and
plan to enter into a long term Lease/Installment - Purchase Agreement. The
project cost of the pipelines, right of way, transfer terminal etc. has been
estimated to be Four Million Dollars and zero cents ($4,000,000.00). This
letter has been prepared to provide the formula to be used in determining the
monthly rental rate adjustment if the Total Installed Cost (TIC) is not said
$4,000,000.00.
ADJUSTMENT FORMULA
-------------------
Actual T.I.C.
----------------- X $68,000 = Adjusted Monthly Rental Rate
-------------------------------
$4,000,000.00
If the Total Installed Cost is within 1% of the estimated cost of
$4,000,000.00 - no adjustment will be made.
If you are in agreement with the aforementioned statements of agreement,
please indicate by executing in the space provided below.
AGREED TO AND ACCEPTED THIS ______ DAY OF ______________ 1999.
PENN OCTANE CORPORATION CPSC INTERNATIONAL
By: _________________________________ By: _________________________________
Name: _______________________________ Name: ________________________________
Title: _______________________________ Title: ________________________________
Date: ________________________________ Date: ________________________________
Acd/rental adjust
<PAGE>
LEASE/INSTALLMENT PURCHASE AGREEMENT
FOR TWO (2) 7-MILE PIPELINES AND TRANSFER TERMINAL
THIS AGREEMENT ("Agreement") is made and entered into as of _________ ___, 1999
by and between PENN OCTANE CORPORATION, a Delaware corporation ("POC"), and CPSC
INTERNATIONAL, a Texas corporation ("CPSC") (collectively referred to as the
"Parties" and individually referred to as a "Party" where either POC or CPSC
could apply).
WHEREAS, CPSC has agreed to design, construct and own two (2) "Pipelines and
Transfer Terminal" (as hereinafter defined) and to lease the Pipelines and
Transfer Terminal to POC, and POC has agreed to lease the Pipelines and Transfer
Terminal from CPSC and to pay the Rental (as hereinafter defined), all under the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
benefits to be derived by each Party hereunder and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties agree as follows:
1. DEFINITIONS
1.1. Definitions. The following terms as used in this Agreement shall have
the respective meanings assigned to them below:
1.1.1. "Pipelines" means those two (2) Pipelines, approximately seven (7)
miles in length and with a nominal 8.625 inch outside diameter (8.625" O.D.) and
with a nominal 6.625 inch outside diameter (6.625" O.D.), to be constructed in
Matamoros, Tamaulipas, Mexico, as more particularly described in Exhibit "A"
attached hereto and made a part hereof.
1.1.2. "Transfer Terminal" means the affixed to or installed equipment,
tanks, etc., regarding the final destination for the receiving of liquefied
petroleum gas and/or the storage plant for re-distribution and re-delivery of a
similar amount of said product.
1.1.3. "Facilities" means the vents, casings, valves, cathodic protection
devices, and other items of personal property which are constructed on, affixed
to or installed on the Pipelines inlet flange to inlet flange and equipment or
facilities used in the operation or monitoring of the Pipelines.
1.1.4. "Easements" means those Pipelines and Transfer Terminal right-of-way
permits, licenses and easements which are to be physically occupied by the
Pipelines, Transfer Terminal and the Facilities and or necessary to operate the
Pipelines, Transfer Terminal and the Facilities as set out in the final design.
<PAGE>
1.1.5. "Operator" means CPSC or its designee.
1.1.6. "Pipeline and Transfer Terminal Assets" means the Pipelines and
Transfer Terminal together with the Facilities and the Easements.
1.1.7. "Operating Requirements" means the general description of the
Pipelines, Transfer Terminal and Facilities to be constructed by CPSC and the
expected operating requirements as determined by POC and as set forth in Exhibit
"B" hereto.
1.1.8. "Substantial Completion Date" is defined in Section 3.6.
1.1.9. "Lease Anniversary Date" means twelve (12) months after the first day
of the month during which the "Substantial Completion Date" occurs.
1.1.10. "Month" means a calendar month.
1.1.10. "Lease Effective Date" means the first day of the Month in which the
Substantial Completion Date occurs.
1.1.11 "Initial Lease Year" means the period commencing on the Lease Effective
Date and ending on the first Lease Anniversary Date thereafter.
1.1.12. "Lease Year" means the Initial Lease Year or any subsequent twelve-month
period commencing on a Lease Anniversary Date during the term of this Agreement.
1.1.13. "Lease Term" is defined in Section 3.8.
1.2. Other Definitions. Terms defined in other portions of this Agreement
------------------
shall have the respective meanings so assigned to them in this Agreement.
2. DESIGN AND CONSTRUCTION
2.1. Design and Specifications. CPSC shall proceed promptly and with due
---------------------------
diligence to prepare the engineering design and specifications of the Pipelines,
Transfer Terminal and the Facilities in order to comply with the Operating
Requirements. CPSC shall complete and provide POC with a copy of such design in
accordance with Exhibit "B", which POC shall expeditiously review. CPSC shall
receive POC's written approval of such design of the Pipelines, Transfer
Terminal and the Facilities prior to commencement of construction. Such design,
which may be subsequently altered, will be described in words and mapped and
shall become Exhibit "A".
2
<PAGE>
2.2. Construction. Following POC's approval of the design, CPSC will
------------
proceed promptly and with due diligence to acquire the Easements and to
construct the Pipelines, Transfer Terminal and the Facilities in accordance with
Exhibit "B" and approved design and specifications.
2.3. Design and Construction Costs. CPSC shall bear and pay the costs
--------------------------------
incurred in connection with the design and construction of the Pipelines,
Transfer Terminal and the Facilities and the acquisition of the Easements.
2.4. Ownership. Except as otherwise provided in Section 5, and unless and
---------
until the option to purchase provided for in Section 5 is exercised, CPSC shall
be the owner of the Pipelines and Transfer Terminal, the Facilities and the
Easements.
2.5. Inspection of Materials and Work.
-------------------------------------
2.5.1. The plans and specifications for the Pipelines and Transfer Terminal
are referred to in this Agreement as "the Design and Specifications" which shall
be included in Exhibit "A".
2.5.2. In accordance with the following provisions, prior to the Substantial
Completion Date, POC shall have the right to inspect the Pipelines, Transfer
Terminal and the Facilities and satisfy itself as to their condition and
compliance with the Design and Specifications. In this regard, CPSC shall
furnish to POC access at all reasonable times to all pipe and other materials to
be used in the construction of the Pipelines, Transfer Terminal and Facilities
and to the work of construction of the Pipelines, Transfer Terminal and
Facilities whenever work is in progress, in order that POC may examine and
inspect the pipe and other materials and observe the work and may assure itself
that the terms of the Design and Specifications are being met. POC shall have
the right to conduct such inspections of the pipe and other materials to be
used in the construction of the Pipelines, Transfer Terminal and Facilities and
of the work at its sole cost, risk and expense. POC and CPSC contemplate that
POC will be given the opportunity to conduct thorough inspections of all work
and all pipe and other materials in the construction of the Pipelines, Transfer
Terminal and Facilities, and that POC will at its discretion conduct inspections
of and will observe certain pipe and materials and certain work as the work
progresses and segments are being constructed. In this connection,
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2.5.2.1. POC shall designate a representative of POC ("POC's
Representative") in order to perform inspections on behalf of POC at POC's
discretion and who shall communicate with CPSC on behalf of POC regarding any
such inspections, notify CPSC of any defective pipe or other equipment and
defects in work or failure to comply with the Design and Specifications
discovered during such inspections, and shall communicate with CPSC regarding
the curing of any discovered defects and repairs to or replacements of any such
defective work and materials.
2.5.2.2. CPSC shall designate a representative of CPSC ("CPSC's
Representative") who shall be responsible for communicating with POC's
Representative on behalf of CPSC for purposes of this Section 2.5.2.2. and shall
be physically present or available by telephone or telefax during inspections by
POC's Representative;
2.5.2.2.1. POC's Representative shall coordinate such inspections to avoid
unnecessarily delaying the progress of work and shall conduct such inspections
of pipe, coating and welding when pipe and workmanship are available for
inspection (that is, before being lowered into the ditch and covered), and CPSC
shall not be obligated to subsequently uncover pipe for inspection which was not
conducted when POC had the reasonable opportunity to do so when the pipe and
workmanship were available for inspection; and
2.5.2.2.2. If, in the reasonable judgment of POC, work or pipe or other
materials are defective or fail to comply with the Specifications, POC's
Representative shall notify CPSC's Representative at the time of POC's
Representative's discovery of such defect or failure or as soon thereafter as
possible, and CPSC shall repair or replace the defective work or materials in a
manner complying with the Design and Specifications (in this regard, any such
notification by POC's Representative which is not initially made in writing
shall be confirmed in writing by POC's Representative within twenty-four hours
after the applicable inspection). The scope of such inspections shall be limited
to determining whether the inspected pipe and materials and the results of the
work comply with the Design and Specifications.
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3. PIPELINE AND TRANSFER TERMINAL LEASE AND RENTAL
3.1. Pipeline and Transfer Terminal Lease. For and in consideration of
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POC's payment of the rentals herein provided, CPSC hereby agrees to lease and
let unto POC, effective as of the Lease Effective Date, the Pipelines, Transfer
Terminal and the Facilities for the Lease Term (as herein defined), on the terms
set forth herein. During the Lease Term, the Pipelines and the Facilities shall
be operated by the Operator in accordance with the terms of the Operating
Agreement attached hereto as Exhibit "C".
3.2. Rental. For the duration of the Lease Term (as herein defined), POC
------
shall pay to CPSC as rental the sum of Eight Hundred Sixteen Thousand Dollars
($816,000.00) per Lease Year (the "Rental"), subject to following provisions of
this Section 3.2. The Rental for each Lease Year is payable in twelve (12)
equal monthly installments of Sixty-Eight Thousand Dollars ($68,000.00) each,
due and payable on or before the last day of each Month provided, however, if
the Substantial Completion Date does not occur on the first day of the Month,
then, solely with respect to the installment of rental payable for the initial
Month of the Initial Lease Year. POC shall make an entire monthly installment.
Such payment shall be considered a prepayment for the partial month's rental at
the end of the Lease Term. POC shall require its customer to make all payments
to an escrow account in the name of CPSC. An escrow agent (RZB) will deduct the
lease payment and any other funds due CPSC from the escrow account and remit the
remainder to POC. A sample escrow agreement is attached as Exhibit "F."
3.3. Letter of Credit. POC shall provide, at closing of the Lease
------------------
Installment Agreement, an irrevocable standby letter of credit to guarantee
payments to CPSC in the amount of Four Hundred Eight Thousand Dollars
($408,000.00). If there is a default in payment, CPSC can call on the letter of
credit for payment. The irrevocable letter of credit will be obtained from a
first rated bank acceptable to CPSC.
3.4. Security Agreement. POC will grant CPSC a first priority security
-------------------
interest in all of its assets (except for accounts receivable and inventory)
including; the POC contract rights with Seadrift, Exxon, and PMI or other PEMEX
entities as security for the timely payment of the lease payments. POC will
provide U.C.C. and lien documents as necessary to perfect CPSC's priority
interest herein mentioned.
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3.5. Default.
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3.5.1. Each of the following shall be deemed a default by POC and a breach
of this Agreement:
3.5.1.1. Filing of a petition for adjudication as a bankrupt, or for
reorganization, or for an arrangement under any Federal or State statue;
3.5.1.2. Dissolution or liquidation of POC, without the transfer to and
assumption by a financially responsible third party of this Agreement;
3.5.1.3. Appointment of a permanent or temporary receiver or a permanent or
temporary trustee of all or substantially all the property of POC;
3.5.1.4. Taking possession of the property of POC by a governmental officer
or agency pursuant to statutory authority for dissolution, rehabilitation,
reorganization or liquidation, nationalization or other similar government
action;
3.5.1.5. Making by POC of an assignment for the benefit or creditors.
3.5.1.6. Filing of a voluntary lien without CPSC's permission, which will
not be unreasonably withheld, or involuntary lien on the assets of POC that are
security for this lease.
If any event mentioned in this Section 3.5.1. shall occur, CPSC may thereupon or
at any time within ninety (90) days thereafter elect to terminate this Agreement
upon ten (10) days' prior written notice to POC and this Agreement shall
terminate on the day in such notice specified with the same force and effect as
if that date were the date herein fixed for the Term of this Agreement.
3.5.2. Default in the payment of the rental or any other amount herein
reserved or any part thereof for a period of sixty (60) days after written
notice of such default from CPSC.
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3.5.3. In the event of any default under Section 3.5.1. and/or 3.5.2., CPSC,
at its option, in addition to all other rights, can present a letter of default
to the __________ bank and draw down on the letter of credit provided by POC,
and can repossess and assume all rights in any assets or agreements that
constitute security for this lease.
3.5.4. Default in the performance of any other covenant or condition of this
Agreement on the part of either party to be performed for a period of sixty (60)
days after written notice from the non-defaulting party specifying the nature of
such default. For purposes of this Section 3.5.4., no default on the part of
either party in performance of work required to be performed or acts to be done
shall be deemed to exist if after receipt of the aforesaid notice the party in
default diligently takes action to rectify the same and prosecutes such action
towards completion with reasonable diligence, subject, however, to avoidable
delays.
3.5.5. In case of any such default under Section 3.5.2. and/or Section
3.5.4. and at any time within ninety (90) days thereafter following the
expiration of the respective grace periods above-mentioned, the non-defaulting
party may serve a notice upon the defaulting party electing to terminate this
Agreement upon a specified date not less than thirty (30) days after the date of
serving such notice and this Agreement shall expire on the date so specified as
if that date had been originally fixed as the expiration date of the Term herein
granted. However, a default under Section 3.5.2. and/or Section 3.5.4. shall be
deemed waived if such default is remedied before the date specified for
termination in the notice of termination served on the defaulting party pursuant
to this Section 3.5.5.
3.6. Substantial Completion. In the event that CPSC, using its best
-----------------------
efforts, determines that it will not be able to meet the Substantial Completion
Date, CPSC shall inform POC. When, in CPSC's judgment, CPSC has completed the
Pipelines, Transfer Terminal and Facilities in a condition to be placed in
service, CPSC shall conduct a hydrostatic pressure test in accordance with the
Design and Specifications. If the Pipelines, Transfer Terminal and Facilities
fail to satisfy such test, CPSC shall use all reasonable efforts to repair the
Pipelines, Transfer Terminal and Facilities so that the Pipelines, Transfer
Terminal and Facilities satisfy such test. "Substantial Completion Date" as
used herein shall occur when, and shall mean the date on which, the Pipelines,
Transfer Terminal and Facilities have satisfied such hydrostatic pressure test
and are clean and dry internally so as to be ready to be placed in service
("Substantial Completion"). CPSC shall use its best efforts to obtain all
necessary rights of way and design, engineer, construct, test and obtain permits
for the Pipelines, Transfer Terminal and Facilities so that the Substantial
Completion Date is no later than May 1, 1999.
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3.7. Certificate. When substantial completion has occurred, the Parties
-----------
shall execute a certificate substantially in the form of Exhibit "D" attached
hereto setting forth such fact, specifying the Substantial Completion Date, and
acknowledging that the lease of the Pipelines, Transfer Terminal and Facilities
commences on the Lease Effective Date.
3.8. Lease Term. The Pipelines, Transfer Terminal and the Facilities are
-----------
leased for a term commencing on the Lease Effective Date and ending on the last
day of the fifteenth (15th) Lease Year or if prior to such date, at the end of
the Lease Year during which POC exercises its option to purchase under Section 5
(i.e., the 10th, or 15th Lease Year, as applicable) (the "Lease Term").
3.9. Insurance. Throughout the Lease Term, CPSC shall, at CPSC's expense,
---------
provide liability insurance. POC shall provide, at its expense, the insurance
necessary for property damage as defined in Section 3.10 below.
3.10. Damage or Destruction. If the Pipelines and Transfer Terminal Assets,
---------------------
or any portion thereof, shall be damaged or destroyed during the Lease Term due
to causes other than either a) Operator's failure to perform any obligations
under the terms hereof (including Exhibit "B") or b) Operator's negligence then,
POC may elect whether or not to repair or rebuild the Pipeline and Transfer
Terminal Assets; provided, however, CPSC shall not have any duty, liability, or
responsibility to perform any repairs, replacement, or reconstruction not fully
funded by POC or insured; and also provided that if Operator shall proceed as
promptly as practicable to complete such repair or rebuilding with all due
diligence and due care and shall make available for inspection by POC as
provided by Section 2.5 all work and materials used to repair or rebuild. In
event of any such damage or destruction, and POC elects not to repair or
rebuild, POC shall have the right to terminate the Lease and Operating Agreement
forthwith and POC and CPSC shall negotiate to determine the unrecovered capital
POC shall pay with any insurance proceeds; salvaged or income from reletting all
or a portion of the Pipelines and Transfer Terminal to be subtracted from the
unrecovered capital.
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3.11. Indemnification of POC. Except as otherwise expressly provided below,
----------------------
from and after the effective date hereof, including the period of design,
engineering and construction of the Pipelines, Transfer Terminal and Facilities
and while CPSC is Operator of the Pipelines, CPSC shall defend, indemnify, and
hold harmless POC, its officers, agents, representatives and employees from and
against any and all claims, losses, damages, causes of action, suits, and
liability of every kind (including, without limitation, expenses of litigation,
court costs and attorneys' fees) of or by any person or entity (including,
without limitation, CPSC and its employees) for injury to or death of any person
or persons, or for damage to any property, arising out of or in connection with
CPSC's operation, repair, replacement, or maintenance of the Pipeline
Facilities, or the escape or loss of any gas or other substance therein or
transported thereby, including, without limitation, injuries, death, or damages
caused by POC's sole negligence or joint negligence except only injuries, death,
or damages caused by POC's gross negligence or willful misconduct. THE PARTIES
EXPRESSLY INTEND THAT THE INDEMNITY PROVIDED IN THIS SECTION 3.11 INCLUDES THE
OBLIGATION OF CPSC TO INDEMNIFY AND PROTECT POC FROM THE CONSEQUENCES OF POC's
OWN NEGLIGENCE, WHETHER THAT NEGLIGENCE IS THE SOLE OR A CONCURRING CAUSE OF THE
INJURY, DEATH OR DAMAGE.
3.12. Indemnification of CPSC. For claims, losses, damages, causes of
-------------------------
action, suits, and liability of every kind (including, without limitation,
expenses of litigation, court costs and attorneys' fees) arising at any time,
providing that such claim arises from POC's operation of the Pipeline Facilities
and/or Transfer Terminal, POC shall defend indemnify and hold harmless CPSC its
officers, agents, representatives and employees from and against any and all
claims, losses, damages, causes of action, suits, and liability of every kind
(including, without limitation, expenses of litigation, court costs and
attorneys' fees) of or by any person or entity (including, without limitation,
POC and its employees) for injury to or death of any person or persons, or for
damage to any property, arising out of or in connection with POC's operation,
repair, replacement, or maintenance of the Pipeline Facilities and/or Transfer
Terminal, or the escape or loss of any product or other substance therein or
transported thereby, including, without limitation, injuries, death, or damages
caused by CPSC's sole negligence or joint negligence except only injuries,
death, or damages caused by CPSC's gross negligence or willful misconduct. THE
PARTIES EXPRESSLY INTEND THAT THE INDEMNITY PROVIDED IN THIS SECTION 3.12
INCLUDES THE OBLIGATION OF POC TO INDEMNIFY AND PROTECT CPSC FROM THE
CONSEQUENCES OF CPSC's OWN NEGLIGENCE, WHETHER THAT NEGLIGENCE IS THE SOLE OR A
CONCURRING CAUSE OF THE INJURY, DEATH OR DAMAGE.
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3.13. Maintenance. The Rental payments set out in Section 3.2 shall include
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all routine maintenance as defined in contracting Operating Agreement Schedule A
of Exhibit C. POC will be responsible for all other maintenance costs. In the
event there is a change in regulations governing the operation of the Pipelines
and Transfer Terminal Assets which results in a substantial increase in
maintenance costs the parties agree to meet to arrive at a mutually agreeable
adjustment to Rental.
3.14. Progress Reports. CPSC shall provide POC progress reports which
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detail the status of the construction and operation of the Pipeline Facilities.
4. OPERATOR
4.1 Initial Operator. CPSC, or its designee, shall be the initial Operator
-----------------
of the Pipelines and the Facilities. POC will be responsible for operations of
the Transfer Terminal.
4.2 Operating Agreement. CPSC, or its designee, acting as Operator of the
--------------------
Pipeline Facilities shall be responsible for and act in accordance with the
terms and provisions of the Contract Operating Agreement attached hereto as
Exhibit "C" (the "Operating Agreement").
5. OPTION TO PURCHASE
5.1. Option to Purchase. POC shall have the following option to purchase
--------------------
the Pipelines and Transfer Terminal, the Facilities and the Easements (the
Pipeline and Transfer Terminal Assets) with closing to occur as set out in
Section 7.
5.1.1. POC shall have the option to purchase the Pipeline and Transfer
Terminal Assets at the end of the tenth (10th) Lease Year, upon 180 days prior
written notice. At Closing, POC shall pay to CPSC the sum of two million five
hundred thousand dollars ($2,500,000.00) as consideration for the Pipeline and
Transfer Terminal Assets.
5.1.2. If POC has not previously exercised its option to purchase, POC shall
have the option to purchase the Pipeline and Transfer Terminal Assets with
closing of such purchase transaction to take place on or before at the end of
the fifteenth (15th) Lease Year, upon 180 days prior written notice. At
Closing, POC shall pay to CPSC the sum of Fifty Thousand Dollars ($50,000.00) as
consideration for the Pipeline and Transfer Terminal Assets.
5.2. Option Price. In the event POC exercises its option to purchase, the
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sum set forth in the applicable clause of Section 5.1 as the consideration for
the Pipeline and Transfer Terminal Assets shall be the "Option Price" as used
herein.
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5.3. Environmental Due Diligence. At any time prior to POC exercising its
------------------------------
option to purchase, POC shall have access to the Pipeline and Transfer Terminal
Assets and all associated records for the purpose of monitoring and assessing
the environmental condition of the Pipeline and Transfer Terminal Assets. Such
monitoring and assessment may include not only a review of records and
documents, but an assessment of the real and personal property associated with
the Pipeline Facilities including but not limited to taking core samples and
other samples for analysis.
6. REPRESENTATIONS AND WARRANTIES; COVENANTS
6.1. Representations and Warranties of CPSC. CPSC represents and warrants
----------------------------------------
to POC:
6.1.1. that the execution, delivery and performance of this Agreement and
the transactions contemplated hereby have been duly and validly authorized by
all requisite corporate action on the part of CPSC; and
6.1.2. that CPSC is a Texas corporation and has all requisite power and
authority to enter into this Agreement and consummate the transactions
contemplated hereby; and
6.1.3. that this Agreement constitutes the valid and legally binding
obligation of CPSC, and the taking by CPSC of the actions contemplated hereby do
not and will not violate or constitute a default under any material agreement,
order, law, statute or regulation or result in the acceleration of any
obligation, deed of trust, or indenture or other encumbrance to which CPSC is a
party; and
6.1.4. that CPSC, or its designee, is duly qualified to own and to operate
the Pipeline and Transfer Terminal Assets.
6.2. Covenants of CPSC. CPSC covenants that CPSC will acquire and maintain
------------------
all permits required by CPSC to own and operate the Pipelines, Transfer Terminal
and Facilities.
6.3. Representations and Warranties of POC. POC represents and warrants to
--------------------------------------
CPSC:
6.3.1. that the execution, delivery and performance of this Agreement and
the transactions contemplated hereby have been duly and validly authorized by
all requisite corporate action on the part of POC; and
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6.3.2. that POC is a Delaware corporation duly organized, validly existing,
and in good standing under the laws of the States of Delaware and Texas, and has
all requisite corporate power and authority to enter into this Agreement and
consummate the transactions contemplated hereby; and
6.3.3. that this Agreement constitutes the valid and legally binding
obligation of POC, and the taking by POC of the actions contemplated hereby do
not and will not violate or constitute a default under any material agreement,
order, law, statute or regulation; and
6.3.4. POC has granted to CPSC that all agreements and assets (except for
accounts receivable and inventory) used as security for this lease, a first and
superior lien to all other creditors and parties. If existing liens are in
place, the current lienholders have subordinated the liens to CPSC; and
6.3.5. that POC, or its designee, is duly qualified to operate the Transfer
Terminal.
7. CLOSING UNDER OPTION TO PURCHASE
7.1. Closing. If POC exercises its option to purchase in a timely and
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proper manner, POC and CPSC agree that the consummation of the sale and purchase
of the Pipeline and Transfer Terminal Assets ("Closing") shall occur at a
mutually agreed upon date at the end of the Lease Year for which POC exercised
its option (i.e., the 10th, or 15th Lease Year, as applicable) ("Closing Date").
The Closing shall be held at the offices of CPSC at Two Allen Center, Suite
2250, Houston, Texas.
7.1.1. Closing Obligations. At the Closing, the following events shall
--------------------
occur, each event under the control of one party hereto being a condition
precedent to the events under the control of the other party, and each event
shall be deemed to have occurred simultaneously with the other events:
CPSC shall duly execute, acknowledge and deliver an Assignment and Bill of Sale
("Assignment"), substantially in the form set forth in Exhibit "E" attached
hereto and made a part hereof;
7.1.2. If POC has not previously done so, POC shall pay to CPSC an amount
equal to the total Option Price in immediately available funds by wire transfer
to CPSC's account at Bank One Texas, N.A.-Houston, Texas, ABA Routing No.
111-000-614 Account No. 182-413-6335 for credit to CPSC; and
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7.1.3. CPSC shall transfer and deliver or cause to be transferred and
delivered to POC the original (or if an original is not available, then a true
copy) of all relevant written instruments, documents and files, or relevant
portions thereof, pertaining to the Pipeline and Transfer Terminal Assets which
are within the possession or control of CPSC (other than material dealing with
matters between CPSC and the contractor).
8. OBLIGATIONS AFTER CLOSING; DISCLAIMER OF WARRANTIES
8.1. Indemnification of CPSC after Closing. If Closing occurs, POC shall
----------------------------------------
indemnify and hold harmless CPSC and its affiliates, and all their contractors,
officers, agents and employees from and against all damages, demands,
liabilities, losses, lawsuits (including, without limitation, court costs and
reasonable attorneys' fees), costs, claims and causes of action (collectively
referred to in this Section 8.1 as "Claims") that arise out of or in connection
with any errors, defects or deficiencies in the engineering, the design or the
construction of the Pipelines, Transfer Terminal and Facilities (including the
Specifications) or the condition of the Pipeline and Transfer Terminal Assets,
or that arise out of or in connection with the ownership, operation,
maintenance, repair or replacement of the Pipeline and Transfer Terminal Assets
after the Closing, provided, however, that POC shall have no indemnification
obligation under this paragraph for any claim caused by CPSC's negligence or
intentional acts.
8.2. DISCLAIMERS OF WARRANTIES; WAIVERS. THE PARTIES AGREE THAT, TO THE
-------------------------------------
EXTENT REQUIRED TO BE OPERATIVE, THE FOLLOWING DISCLAIMERS OF WARRANTIES ARE
"CONSPICUOUS" DISCLAIMERS FOR THE PURPOSES OF APPLICABLE LAW. THIS AGREEMENT IS
MADE AND ACCEPTED, AND IF POC EXERCISES ITS OPTION TO PURCHASE THE ASSIGNMENT
WILL BE MADE AND ACCEPTED, WITH THE UNDERSTANDING AND AGREEMENT OF THE PARTIES
THAT IF POC EXERCISES ITS OPTION TO PURCHASE, THE PIPELINE AND TRANSFER TERMINAL
ASSETS AND ALL PERSONAL PROPERTY, MACHINERY, FIXTURES, EQUIPMENT AND MATERIALS
COVERED HEREBY SHALL BE SOLD AND ASSIGNED AND ACCEPTED BY POC IN THEIR CONDITION
AT THAT TIME, "AS IS, WHERE IS, AND WITH ALL FAULTS" AT THAT TIME, WITHOUT ANY
WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, OF QUALITY, CONDITION,
MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE OR USE, OR DESIGN,
PERFORMANCE, CONDITION, OR OF ANY OTHER KIND, ALL OF WHICH ARE EXPRESSLY
DISCLAIMED; PROVIDED, HOWEVER, CPSC WARRANTS THAT THE PIPELINE FACILITIES ARE IN
GOOD OPERATING ORDER AND WHILE CPSC WAS OPERATOR PIPELINE FACILITIES WERE
OPERATED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS AND THAT THE
FOREGOING DISCLAIMERS DO NOT NEGATE OR DETRACT IN ANY WAY FROM ANY WARRANTIES TO
BE SET FORTH IN THE ASSIGNMENT.
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9. TAXES
9.1. Sales Taxes. If the option to purchase provided for in Section 5.1
------------
is exercised, the Option Price provided for in Section 5.2 shall not include
(and POC shall not otherwise pay CPSC for) any sales or use tax or other excise
taxes, fees or levies. However, in the event that a taxing authority(ies) deems
any such tax, fee or levy to arise out of or in connection with the exercise of
the option to purchase under Section 5.1, POC shall be responsible for payment
thereof and shall indemnify and hold CPSC harmless with respect to the payment
of any such taxes, fees or levies. The Parties agree that, under no
circumstance (other than challenge by a taxing authority) shall any sales or use
tax, other excise tax, fees or levies be due prior to exercise of the option to
purchase.
9.2. Other Taxes and Fees. If the option to purchase provided for in
-----------------------
Section 5.1 is exercised, proration of ad valorem taxes, water taxes, hazardous
waste taxes, utility and fuel charges, permit and inspection fees, and any other
taxes levied on or with respect to the Pipeline and Transfer Terminal Assets
(other than taxes covered in Section 9.1 above) shall be made as of the Closing
Date specified in Section 7, with all such items attributable to the period
prior the Closing Date to be for the sole account of CPSC, and all such items
attributable to the period on or after the Closing Date to be for the sole
account of POC.
9.3. Cooperation. Each Party shall provide the other party with
-----------
reasonable access to all relevant documents, data and other information which
may be required by the other Party for the purpose of preparing tax returns and
responding to any audit by any taxing jurisdiction. Each Party shall cooperate
with all reasonable requests of the other Party made in connection with
determining or contesting tax liabilities attributable to the Pipeline and
Transfer Terminal Assets. Notwithstanding anything to the contrary contained in
this Agreement, neither Party to this Agreement shall be required at any time to
disclose to the other Party any tax returns or other confidential tax
information.
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10. MISCELLANEOUS
10.1. Commissions. Whether or not the Closing occurs, (a) CPSC shall
-----------
indemnify and hold harmless POC from and against any and all liability for any
brokers' of finders' fees arising with respect to any brokers or finders
retained or engaged by CPSC in respect to the transactions contemplated by this
Agreement, and (b) POC shall indemnify and hold harmless CPSC from and against
any and all liability for any brokers' or finders' fees arising with respect to
any brokers or finders retained or engaged by POC in respect to the transactions
contemplated by this Agreement.
10.2. Fees. Each Party hereto shall bear and be responsible for all fees,
----
costs and expenses (including, without limitation, legal, accounting and
engineering expenses) incurred by such party with respect to the negotiation and
execution of this Agreement.
10.3. Notices. All notices, requests, demands, instructions and other
-------
communications required or permitted to be given hereunder shall be in writing
and shall be delivered personally, by messenger or mail courier service with
receipt obtained thereby or mailed by registered mail, or certified mail, return
receipt requested, postage prepaid, as follows:
If to POC, addressed to:
PENN OCTANE CORPORATION and PENN OCTANE CORPORATION
---
900 Veterans Blvd., Suite 240 12118 South Bloomfield
Redwood City, CA 94063 Santa Fe Springs, CA 90620
Attention: Mr. Jerome B. Richter Attention: Financial Officer
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<PAGE>
If to CPSC, addressed to:
CPSC INTERNATIONAL
Two Allen Center, Suite 2250
1200 Smith Street
Houston, Texas 77002
Attention: Mr. Eric B. DuBose
or to such other place as either party may designate as to itself by written
notice to the other. All notices will be deemed given on the date of receipt at
the appropriate address.
10.4. Force Majeure. A Party shall be excused from complying with the terms
-------------
of this Agreement, except the payment term, if and for so long as such
compliance is hindered, prevented or made unsafe by strikes or other labor
disturbances, riots, wars (declared or undeclared), insurrection, rebellions,
terrorist acts, civil disturbances, dispositions, acts of God, inability to
obtain equipment, supplies or fuel which was not reasonably foreseeable,
epidemics, lightning, earthquakes, fires, storms, hurricanes, floods, washouts,
breakage or accident to machinery, equipment or lines of pipe, freeze-ups of
lines of pipe or equipment, the necessity to make repairs or tests to lines of
pipe or equipment, laws, rules, regulations, orders of governmental entities,
agencies, or authorities, or by other act or cause, whether similar or
dissimilar, which is reasonably beyond the control of such Party, such causes
being herein sometimes called "Force Majeure." If any failure to comply with
this Contract is occasioned by a governmental law, rule, regulation,
disposition, or order and the affected Party is operating in accordance with
accepted practice in the area of operations and is making reasonable effort to
comply with such law, rule, regulation, disposition, or order, the matter shall
be deemed beyond the control of the affected Party. In the event that either
Party hereto is rendered unable, wholly or in part, temporarily or permanently,
by any of these causes to carry out its obligations under this Contract, it is
agreed that such Party shall give notice and details of such occurrence of Force
Majeure, along with an estimate as to the time of delay, in writing to the other
Party as promptly as possible after its occurrence. In such cases, such
obligations of the Party giving the notice shall be suspended during the
continuance of any inability so caused.
10.5. Governing Law. THIS AGREEMENT IS TO BE CONSTRUED IN ACCORDANCE WITH
--------------
THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICT OF LAWS. IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES, THEY SHALL
USE THEIR BEST EFFORTS TO MUTUALLY AGREE UPON AN ALTERNATIVE FORM OF DISPUTE
RESOLUTION ("ADR") BEFORE AN ADR PANEL OR ADR INDIVIDUAL IN HOUSTON, TEXAS; ANY
JUDGMENT ENTERED THEREUPON SHALL BE FILED ONLY IN THE STATE OR FEDERAL COURTS OF
TEXAS. IN THE EVENT OF (a) FAILURE TO AGREE ON ADR METHOD, (b) FAILURE TO
CONSENT TO A NON-BINDING ADR DECISION, OR (c) APPEAL OF, OR CHALLENGE TO, AN ADR
DECISION, THEN ANY LEGAL ACTIONS FILED MAY BE BROUGHT ONLY IN THE STATE OR
FEDERAL COURTS AT HOUSTON, TEXAS. IF THERE IS ANY COURT RULING THAT MEXICO HAS
JURISDICTION OVER ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE DISPUTE SHALL BE
FINALLY SETTLED BY BINDING ARBITRATION UNDER THE RULES OF THE I.C.C. USING THREE
ARBITRATORS TO BE CONDUCTED IN ENGLISH, IN HOUSTON, TEXAS.
16
<PAGE>
10.6. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors of the Parties, but shall not be assigned by either
Party and if assignment is attempted it shall be null and void without the prior
written consent of the other Party, which consent shall not unreasonably be
withheld, except that assignment to a parent corporation, subsidiary of a parent
corporation, or a successor to substantially all of the business of the Parties
shall not require the other Party's consent to become effective. In any
assignment the Assignor shall guarantee the full performance of the terms and
conditions of this Agreement by the Assignee.
10.7. Entire Agreement; Amendments. This Agreement shall constitute the
------------------------------
entire agreement between the Parties with respect to the subject matter hereof,
superseding any and all prior negotiations, discussions, agreements and
understandings, whether oral or written, relating to such subject matter. This
Agreement may not be amended, and no rights hereunder may be waived, except by a
written document signed by the Party to be charged with such amendment or
waiver.
10.8. Severability. If any one or more of the provisions contained in this
-------------
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement.
10.9. No Consequential or Punitive Damages. In the event of breach or
----------------------------------------
violation of this Agreement, neither Party shall be entitled to recover
consequential or punitive damages from the other Party, and each Party hereby
waives any claim or right to consequential or punitive damages hereunder.
10.10. Headings; References. The headings of the articles and sections of
---------------------
this Agreement are for guidance and convenience of reference only and shall not
limit or otherwise affect any of the terms or provisions of this Agreement.
References herein to an "Exhibit" shall be to an Exhibit of this Agreement
unless a contrary intent is clearly stated.
17
<PAGE>
10.11. Counterparts. This Agreement may be executed by POC and CPSC in any
------------
number of counterparts, each of which shall be deemed an original instrument,
but all of which together shall constitute but one and the same instrument.
10.12. Recording Fees. POC shall pay all recording fees relating to the
---------------
filing of instruments transferring title from CPSC to POC.
10.13. Conflict. In the event of any conflict or inconsistency between the
--------
Specifications and the terms and provisions of this Agreement, the terms and
provisions of this Agreement shall prevail and govern.
10.14. Publicity. All notices to third parties and other publicity
---------
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between POC and CPSC; provided, however, no such
notices or other publicity shall disclose the Option Price of the Pipeline and
Transfer Terminal Assets, except as required by law. No Party shall act
unilaterally in this regard without the prior written approval of the other,
unless required by law.
10.15. Waiver. No waiver of any term, provision or condition of this
------
Agreement shall be effective unless in writing signed by the parties hereto, and
no such waiver shall be deemed to be or construed as a further or continuing
waiver of any such term, provision or condition or as a waiver of any other
term, provision or condition of this Agreement, unless specifically so stated in
such written waiver.
10.16. Facsimile. Facsimile copies of all documents required for Closing
---------
hereunder, including signatures thereon, shall constitute original copies
thereof and shall be binding on the parties hereto. POC and CPSC will, within
five (5) working days of the Closing Date, send to the other an original of all
documents executed by the parties hereto for Closing.
10.17. First Right of Refusal. If CPSC desires to sell this lease to a
-------------------------
non-affiliated third party, CPSC shall notify POC of CPSC's offer and give POC
ten (10) days to make a firm and binding offer with proof of financing to
purchase this lease which is equivalent to or better than the offer to purchase
that CPSC has presented to POC. If POC fails to make a binding offer as stated
above within ten (10) days of receipt of CPSC's offer, then in that event, CPSC
shall have the right to proceed with the sale of the lease to a third party.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have executed this Agreement
as of the date first above written. POC is executing this Agreement subject to
POC's Board of Directors' approval. Said approval will be confirmed by letter
from Jerome Richter to CPSC.
CPSC: POC:
CPSC INTERNATIONAL PENN OCTANE CORPORATION
By: By:
------------------------- -------------------------
Name: Eric B. DuBose Name: Jerome Richter
------------------------- -------------------------
Title: President Title: Chief Executive Officer
------------------------- -------------------------
19
EXHIBIT "A"
DESIGN AND SPECIFICATIONS
CPSC INTERNATIONAL (CPSC) will design, construct, and own two (2) new Pipelines
(8" and 6") and Transfer Terminal for PENN OCTANE CORPORATION (POC) from POC's
LPG terminal in Brownsville, Texas to a prescribed location on the Mexican side
of the Rio Grande River west of Matamoros, Tamaulipas, Mexico.
All of the design and construction of the proposed Pipelines and Transfer
Terminal will be in accordance with the DOT CFR Title 49 Part 195,
"Transportation of LPG Gas by Pipelines"; ANSI B31.8, "Gas Transportation Piping
Systems", AI 1104, "Standard for Welding Pipelines and Related Facilities", CFR
Title 29 Part 1910, "Occupational Safety and Health Standards (OSHA)", and
applicable Pipeline Standard Specifications and Engineering Standards. All
design will be to ANSI 600 and all facilities will be hydrostatically tested to
1800 psig.
A - 1
<PAGE>
EXHIBIT "B"
OPERATING REQUIREMENTS
General Description
- --------------------
CPSC INTERNATIONAL (CPSC) will design, construct, own and operate two (2) new
Pipelines (8" and 6") for PENN OCTANE CORPORATION (POC) from POC's LPG terminal
in Brownsville, Texas to a prescribed location on the Mexican side of the Rio
Grande River west of Matamoros, Tamaulipas, Mexico.
Scope - General Design Criteria
- -----------------------------------
All of the design and construction of the proposed pipelines will be in
accordance with the DOT CFR Title 49 Part 195, "Transportation of LPG Gas by
Pipelines"; ANSI B31.8, "Gas Transportation Piping Systems", AI 1104, "Standard
for Welding Pipelines and Related Facilities"; CFR Title 29 Part 1910,
"Occupational Safety and Health Standards (OSHA)"; and applicable Pipelines
Standard Specifications and Engineering Standards. All design will be to ANSI
600 and all facilities will be hydrostatically tested to 1800 psig unless
directed otherwise by POC.
Schedule
- --------
CPSC will commence the described activities as outlined in the contract
immediately upon execution of the contract in order to meet the substantial
completion date of May 1, 1999.
Project Services
- -----------------
In accordance and as per the terms of the contract CPSC will provide and be
responsible for the following:
- - Final Route Selection
- - Final Design Layout for Transfer Terminal
- - Engineering Design per Function Code Specifications for LPG Pipelines
- - Project Management and Material and Equipment Procurement
- - Construction
- - 100% X-Ray
- - Hydrostatically tested, dried and cleaned to -0 F.
- - Inspection
- - Cathodic protection
B - 1
<PAGE>
- - Capital funding (interim/long term)
- - Construction Insurance
- - Operation and routine maintenance of pipeline and facilities
In accordance and as per the terms of the contract POC will be responsible for:
- - Sales Tax on product sale.
B - 2
<PAGE>
EXHIBIT "C"
CONTRACT OPERATING AGREEMENT
THIS CONTRACT OPERATING AGREEMENT ("Operating Agreement") is made and entered
into as of the ___ day of __________, 1999, by and between CPSC INTERNATIONAL
("CPSC" or "Operator"), a Texas corporation, and PENN OCTANE CORP. ("POC"), a
________________ corporation (hereinafter referred to collectively as the
"Parties" and individually as a "Party" where either POC or CPSC could apply).
WHEREAS, CPSC is the owner of the "Pipelines and Transfer Terminal" hereinafter
described and concurrent CPSC and POC shall enter into an Agreement for lease of
the Pipelines and Transfer Terminal to POC under the terms of the
Lease/Installment Purchase Agreement, hereinafter described; and pursuant to the
Lease/Installment Purchase Agreement, CPSC has agreed to operate the Pipeline
Facilities on a contract basis in accordance with the terms, conditions and
provisions of this Operating Agreement; and
WHEREAS, POC may take over operatorship of the Pipeline Facilities at some time
in the future; and
WHEREAS, throughout this Exhibit the reference to Operator will refer to CPSC;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree as follows:
I. SCOPE OF OPERATING AGREEMENT
1.1 General. This Operating Agreement is entered into pursuant to the terms
-------
of the Lease Installment Purchase Agreement for two (2) 7-mile Pipelines and
Transfer Terminal ("Lease Installment Purchase Agreement") between POC and CPSC
dated . All capitalized terms used in this Operating
Agreement which are defined in the Lease/Installment Purchase Agreement shall
have the respective meanings assigned to such terms in the Installment Purchase
Agreement; and, as used herein, the term "Pipeline Facilities" shall include the
Pipelines and the Facilities. The effective date of this Operating Agreement
("Effective Date") is the same date as the Lease Effective Date. Under the
terms, conditions and provisions of this Operating Agreement, Operator agrees to
furnish all expertise, services, materials, equipment, supplies and labor for
the operation of the Pipeline Facilities and routine maintenance thereof, as
described in Exhibit "A" ("Operations and Routine Maintenance").
C - 1
<PAGE>
1.2 Operator. CPSC shall serve as the operator of the Pipelines and
--------
Facilities ("Operator") pursuant to the terms of this Operating Agreement and
subject to the terms of the Lease/Installment Purchase Agreement. In accordance
with this Operating Agreement, Operator shall perform Operations and Routine
Maintenance for and on behalf of POC and in POC's name; and POC hereby
constitutes and appoints Operator the agent and attorney in fact for POC, hereby
authorizing and empowering Operator in the name and on behalf of POC to do and
perform any and all acts that Operator shall, in the exercise of its sole
judgment deem or find necessary, requisite, or proper for the efficient
performance of Operations and Routine Maintenance, subject to the limitations
contained in this Operating Agreement.
1.3 Independent Contractor Relationship. The relationship of Operator to
-------------------------------------
POC shall be that of an independent contractor, Operator not being subject to
the control or direction of POC, and POC being interested only in the results to
be obtained. All employees shall be the employees of Operator, and not of POC.
Hours of work, compensation of employees, and similar matters shall be within
the discretion of Operator and will be performed in a good and workmanlike
manner.
1.4 Performance. Operator shall have full control of the Pipeline
-----------
Facilities and the operation thereof as permitted and required by, and within
-
the limits of, this Operating Agreement. Operator shall conduct all its
activities under this Operating Agreement in accordance with applicable laws and
regulations and industry standards, and in a good and workmanlike manner.
II. RESPONSIBILITIES OF OPERATOR
2.1 General Responsibilities of Operator. Subject to the terms and
---------------------------------------
provisions of this Operating Agreement, Operator shall, at Operator's expense,
operate and perform maintenance of the Pipeline and Facilities Assets as
described in Schedule A.
2.2 Normal Operations. It is contemplated that normal operations will
------------------
include operating the Pipelines for the transportation of Liquid Petroleum Gas
(LPG) from POC's Brownsville Terminal to said Transfer Terminal located in
Matamoros, Tamaulipas, Mexico. POC shall communicate fully with Operator
regarding operations. Operator shall use all reasonable efforts to make and to
implement operating decisions that will minimize any adverse effect on the
transmission of LPG through the Pipelines. If the implementation of an
operational decision during a non-emergency situation could reasonably be
anticipated to impair the transmission of LPG through the Pipelines at the rate
such LPG is scheduled to be taken, Operator shall use all reasonable efforts to
give POC twenty-four (24) hours prior notice of any such decision.
C - 2
<PAGE>
2.3 Emergencies. Notwithstanding any other provision of this Operating
-----------
Agreement, in case of explosion, fire, flood, extreme cold, freezing or other
sudden emergency, or sudden major interruption of the operation of the Pipeline
Facilities, or any part thereof, Operator shall notify POC as soon as possible
and communicate Operator's recommendation for protective, remedial and other
actions, but where the situation does not permit time for obtaining POC's
specific approval, the prior approval of POC shall not be a prerequisite to
Operator's taking such steps and incurring such costs as, in Operator's
judgment, are required to deal with such emergency or interruption or to
safeguard life and/or property in such event; provided, however, that Operator
shall, as promptly as possible, report such emergency or interruption to POC and
endeavor to secure from POC authorization required for any further action or
expenditure. Operator shall also promptly make any required reports of such
emergency or interruption to federal, state or local regulatory authorities
having jurisdiction.
2.4 Records and Reports. Operator shall retain all records, books of
---------------------
account, reports and other documents related to the operation and maintenance of
the Pipelines for a period of two (2) years from the date of completion of the
activity to which such records relate, or such longer period as specified by law
in the case of those records which by government regulations must be retained
for a longer period of time.
2.5 Employees, Consultants and Subcontractors.
--------------------------------------------
2.5.1 All personnel engaged or directed by Operator in the performance of
Operator's duties and obligations under this Operating Agreement and all
contractors (and their subcontractors) and consultants retained by Operator
shall be duly qualified and experienced to perform such duties and obligations.
Operator shall require such Persons to comply with all relevant laws, statutes,
ordinances, safety codes, regulations and rules of governmental authorities
applicable to the Pipelines.
2.5.2 Operator shall maintain and shall require all contractors (and their
subcontractors) performing services in connection with the Pipelines to maintain
in force and effect Worker's Compensation insurance coverage as required by the
laws of Texas.
2.5.3 Operator shall implement and enforce an appropriate safety program and
shall use its best efforts to cause all employees, contractors, subcontractors,
consultants, vendors and suppliers to perform their services in a safe, sound,
workmanlike and prudent manner, in accordance with industry practices and
applicable laws, rules, regulations and safety codes.
C - 3
<PAGE>
III. PAYMENTS AND RELATED MATTERS
3.1 Monthly Statements. For informational purposes only, on a requested
-------------------
basis, Operator shall prepare and deliver to POC a written itemization of all
expenditures for labor, material, Subcontractors' fees and other costs incurred
by Operator in connection with routine maintenance expenses.
3.2 Account Books. Operator shall maintain records of costs, expenses and
--------------
expenditures incurred in performing any of its obligations under this Operating
Agreement, so as to provide POC with the information required for accounting,
regulatory, tax (including federal, state and local), insurance, financing, and
other reasonable purposes.
3.3 Review of Records. POC shall have the right at all reasonable times
-------------------
during ordinary business hours to examine and make copies of the books of
account and records maintained by Operator regarding the Pipelines, including
the records maintained pursuant to Sections 2 and 3 of this Operating Agreement.
Such right may be exercised through an agent or employee designated in writing,
or by an independent accountant or attorney so designated. POC shall bear all
expenses incurred in connection with any such inspection, examination or
copying.
3.4 Access. Operator shall permit POC, at POC's risk, full and free access
------
to the Pipeline Facilities at all reasonable times.
VI. TERM
4.1 Term. This Operating Agreement shall become effective as of the
----
Effective Date and shall continue in force and effect for a period of fifteen
(15) years, and from year to year thereafter; or until terminated in accordance
with the said Lease/Installment Purchase Agreement.
4.2 Termination by POC. This Operating Agreement may be terminated at any
--------------------
time by POC (i) in the event Operator violates any safety standard or code and
does not remedy such situation within thirty (30) days after notice, or (ii) in
the event Operator breaches any other provision hereof or fails or refuses to
timely perform any of its duties hereunder and fails or refuses to cure such
deficiency or default within thirty (30) days after receipt of notice of such
default by POC. If Operator becomes insolvent, bankrupt or is placed in
receivership, it shall be deemed to have resigned as Operator, and this
Operating Agreement shall terminate. If a petition for relief under the federal
bankruptcy laws is filed by or against Operator, and the removal of Operator
and/or the termination of this Operating Agreement is prevented by the federal
bankruptcy court, then at POC's option, POC, Operator and a third Party selected
by POC shall comprise an interim operating committee to serve until Operator has
elected to reject or to assume this Operating Agreement, and all actions shall
require the agreement of two (2) members of the operating committee.
C - 4
<PAGE>
4.3 Effect. Termination of this Operating Agreement shall not relieve
------
either Party of any obligation or liability on account of obligations accruing
or conduct or events occurring prior to the date of such termination.
4.4 All other terms and conditions of the Lease Installment Purchase
Agreement are hereby incorporated by reference.
EXECUTED as of the date first above written.
CPSC INTERNATIONAL PENN OCTANE CORPORATION
By: By:
- -------------------------------- ---------------------------------
Printed Name: Eric B. DuBose Printed Name: ________________
- -------------------------------- ---------------------------------
Title: President Title: ________________________
- -------------------------------- ---------------------------------
C - 5
<PAGE>
Schedule A
(of Operating Agreement)
_______________________________
SERVICES PROVIDED:
1. Operator will provide the following documentation services:
- - Document maintenance activities and inspections for the activities listed
in items 2 through 4 below as necessary to comply with existing Department of
Transportation (DOT) and Texas Railroad Commission (TRC) requirements and OSHA.
2. Operator will provide the following operating and engineering services:
- - Maintain and update as needed all drawings and alignment maps. (DOT/TRC)
- - Perform 24 hour pipeline surveillance via SCADA or similar monitoring
equipment.
3. Open/shut appropriate valves to start/end all deliveries that require
manual operations and coordinate all such activity with the appropriate POC
personnel.
- - Inspect corrosion coupons and/or test spool pieces, change them when, in
operator's judgement it is necessary, and report findings to POC semiannually or
more frequently if in operator's judgment circumstances warrant. (DOT/TRC)
- - Perform annual cathodic protection surveys. (DOT/TRC)
- - Review operating and maintenance manuals annually. (DOT/TRC)
4. Operator will provide the following measurement services:
- - Prove each meter up to once per three (3) month for the purpose of
assuring accurate measurement or as reasonably requested by POC to ensure
accurate measurement.
- - Identify volume discrepancies in a timely manner.
- - Provide daily and monthly summary of measurement figures into and out of
the pipeline to the appropriate POC personnel.
C - 6
<PAGE>
- - Calibrate instrumentation semiannually and inspect relief valves
semiannually. (DOT/TRC)
5. Operator will provide only the following routine maintenance services:
- - Perform ROW patrols as required by existing regulation. (DOT/TRC)
- - Perform ROW maintenance (mowing, clearing, and replacing and painting
markers, vents and fence posts). (DOT/TRC)
- - Inspect fire extinguishers monthly. (OSHA)
- - Provide inspection during foreign construction activities and respond to
"one-calls".
- - Inspect mainline block valves semiannually. (DOT/TRC)
- - Perform annual gas line leak survey. (DOT/TRC)
- - Inspect above ground piping and spans every five (5) years. (TRC)
6. Operator will provide the following Scheduling and Control Room Operating
services:
- - Schedule the pipeline transportation service to meet whenever feasible
POC's operational requirements in a safe and efficient manner.
- - Provide twenty-four (24) hour Control Center coverage including
maintaining the on-line computer system.
C - 7
<PAGE>
EXHIBIT "D"
CERTIFICATE OF SUBSTANTIAL COMPLETION
REFERENCE for all purposes is hereby made to that certain Lease/Installment
Purchase Agreement ("Agreement") for two (2) 7-mile Pipelines and Transfer
Terminal dated ____________ _____, 1999, between PENN OCTANE CORPORATION ("POC")
and CPSC INTERNATIONAL ("CPSC"). Capitalized terms which are defined in the
Agreement are used in this Certificate with the same meaning.
Pursuant to the terms of Section 3.6. of the Agreement, POC and CPSC agree,
certify, and acknowledge as follows:
(1) Substantial Completion date occurred on, ____, 199.
(2) The Lease Effective Date is, 199__.
(3) The Pipelines, Transfer Terminal and the Facilities are leased to
POC under the terms of the Agreement effective as of the Lease Effective Date.
(4) The Lease Term commenced on the Lease Effective Date and will end
on _________, 2014 , unless and until the option to purchase provided for in
Article V is exercised, in which case the Lease Term shall end at the end of the
Lease Year for which POC exercises its option (i.e., the 10th, or 15th Lease
Year, as applicable).
(5) The Operating Agreement became effective on the Lease Effective Date.
EXECUTED this day of, 199.
PENN OCTANE CORPORATION
By: _______________________________________
CPSC INTERNATIONAL
By: _______________________________________
D - 1
<PAGE>
EXHIBIT "E"
ASSIGNMENT AND BILL OF SALE
This ASSIGNMENT AND BILL OF SALE ("Assignment") is made and entered into by
and between CPSC INTERNATIONAL, a Texas corporation, with an office at Two Allen
Center, Suite 2250, 1200 Smith Street, Houston, Texas 77002 ("Assignor"), and
PENN OCTANE CORPORATION, a Delaware corporation, with an office at 900 Veterans
Blvd., Suite 240, Redwood City, CA 94063 ("Assignee"), pursuant to that certain
Lease/Installment Purchase Agreement ("Purchase and Sale Agreement") dated
November 24, 1998, between Assignor and Assignee.
For and in consideration of the premises and the sum of Ten Dollars and
other valuable consideration, the receipt of which is hereby acknowledged,
Assignor hereby SELLS, TRANSFERS AND ASSIGNS to Assignee all of the following
described property;
(a) Those certain Pipelines and Transfer Terminal located in Matamoros,
Tamaulipas, Mexico, described in Exhibit "A" attached hereto, together with all
vents, casings, valves, cathodic protection devices and other property and
equipment constructed on, affixed to or installed on said pipelines
(collectively, the "Pipeline, Transfer Terminal and Facilities"); and
(b) To the extent of Assignor's ability to transfer the same, all of
Assignor's right, title, and interest in and to the pipelines a right-of-way
easements, licenses, and permits (collectively, the "Easements");
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns.
This Assignment is made by Assignor and accepted by Assignee subject to the
following:
1. This Assignment is made subject to the terms and provisions of the
Purchase and Sale Agreement, to the terms and provisions of the right-of way
easements and licenses in which the Pipeline Facilities and Transfer Terminal
are located, and to the following, to the extent the same are valid and
subsisting and pertain to the Pipeline Facilities, Transfer Terminal and
Easements in which they are located: any and all restrictions, covenants,
conditions, easements, licenses, leases and other matters of record in the
public records of , and zoning laws, regulations and
ordinances of municipal and other governmental authorities.
2. Assignor hereby binds Assignor and its successors to warrant and forever
defend all and singular the title to the Pipeline Facilities and Transfer
Terminal, subject as aforesaid, unto Assignee, its successors and assigns,
against the claims of all persons lawfully claiming or to claim the same or any
part thereof by, through or under Assignor, but not otherwise.
E - 1
<PAGE>
3. THE PIPELINE FACILITIES AND TRANSFER TERMINAL ARE SOLD AND ASSIGNED AND
ACCEPTED BY ASSIGNEE "AS IS, WHERE IS," AND IN THEIR PRESENT CONDITION, AND
"WITH ALL FAULTS," WITHOUT ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR
STATUTORY, OF QUALITY, CONDITION, MERCHANTABILITY AND/OR FITNESS FOR A
PARTICULAR PURPOSE OR USE, DESIGN, PERFORMANCE, CONDITION, OR OF ANY OTHER KIND,
ALL OF WHICH ARE EXPRESSLY DISCLAIMED; PROVIDED, HOWEVER ASSIGNOR WARRANTS THAT
THE PIPELINE FACILITIES ARE IN GOOD OPERATING ORDER AND THAT WHILE ASSIGNEE WAS
OPERATOR UNDER THE OPERATING AGREEMENT THE PIPELINE FACILITIES WERE OPERATED IN
ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS AND THAT THE FOREGOING
DISCLAIMERS DO NOT NEGATE OR DETRACT IN ANY WAY FROM ANY WARRANTIES SET FORTH IN
PARAGRAPH 2 OF THIS ASSIGNMENT.
EXECUTED THIS THE _____ DAY OF ________________.
CPSC INTERNATIONAL
By:
----------------------------
Eric B. DuBose, President
E - 2
<PAGE>
EXHIBIT "F"
ESCROW AGRREMENT
AGREEMENT made as of this ________day of _________________, 19__, by and between
__________________________________, a____________________ corporation
("___________") and _________________________________ ________________ Bank as
escrow agent (the "Escrow Agent").
WITNESSETH:
WHEREAS,
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, the parties hereto agrees as follows:
1. Acceptance by Escrow Agent
-----------------------------
The Escrow Agent hereby accepts the appointment as escrow agent hereunder and
agrees to act on the terms and conditions hereinafter set forth.
2. Investment of Escrow Fund
----------------------------
The Escrow Agent shall invest the Escrow Fund, upon the express written
direction of _______________________________, in one or more of the following
investments:
3. Rights and Responsibilities of Escrow Agent
------------------------------------------------
The acceptance by the Escrow Agent of its duties hereunder is subject to the
following terms and conditions, which the parties to this Agreement hereby shall
govern and control with respect to the Escrow Agent's rights, duties,
liabilities and immunities.
(a) The Escrow Agent shall act hereunder as a depository only, and it shall
not be responsible or liable in any manner whatever for the sufficiency,
correctness, genuineness or validity of any document furnished to the Escrow
agent or any asset deposited with it.
(b) The Escrow Agent shall be protected in acting upon written instructions
from _____________________ if it, in good faith, believes such written
instructions to be genuine and what it purports to be.
F - 1
<PAGE>
__________________shall from time to time file with the Escrow Agent a certified
copy of each resolution of its Board of Directors authorizing the person or
persons to give written instructions. Such resolution shall specify the class of
instructions that may be given by each person to the Escrow Agent, under this
Agreement, together with certified signatures of such persons authorized to
sign. This shall constitute conclusive evidence of the authority of the
signatories designated therein to act. It shall be considered in full force and
effect with the Escrow Agent fully protected in acting in reliance thereon
unless and until it receives written notice to the contrary.
(c) The Escrow Agent shall not be liable for any error of judgment or for
any action taken or omitted by it in good faith, or for any mistake of fact or
law, or for anything which it may do or refrain from doing in connection
herewith except its own gross negligence or willful misconduct.
(d) ____________________and ___________________agree to indemnify the Escrow
Agent and hold it harmless from and against any loss, liability, expenses
(including reasonable attorneys' fees and expenses), claim or demand arising out
of or in connection with the performance of its obligations in accordance with
the provisions of this Escrow Agreement, except for the gross negligence or
willful misconduct of the Escrow Agent. These indemnities shall survive the
resignation of the Escrow Agent or the termination of this Escrow Agreement.
(e) The Escrow Agent shall have no duties except those specifically set
forth in this Agreement. This Agreement represents the entire understanding of
the parties hereto with respect to the subject matter contained herein and
supersedes any and all other and prior agreements between them.
(f) The Escrow Agent shall have the right at any time it deems appropriate
to seek an adjudication in court of competent jurisdiction as to the respective
rights of the parties hereto and shall not be held liable by any party hereto
for any delay or the consequences of any delay occasioned by such resort to
court.
(g) The fee of the Escrow Agent for its services hereunder shall be paid by
________________ in accordance with the standard schedule of charges in effect
when services are rendered. Such schedule will be furnished upon request.
F - 2
<PAGE>
4. Statements
----------
During the term of this Agreement, the Escrow Agent shall provide
_________________________with monthly statements containing the beginning
balance in the escrow account as well as all principal and income transactions
for the statement period. ___________________________ shall be responsible for
reconciling such statements. The Escrow Agent shall be forever released and
discharged from all liability with respect to the accuracy of such statements,
except with respect to any such act or transaction as to which
____________________________shall, within 90 days after the furnishing of the
statement, file written objections with the Escrow Agent.
5. Distributions
-------------
The Escrow Agent shall distribute the Escrow Funds from time to time, in
accordance with the instructions contained in written statements provided to the
Escrow Agent by _________________________________________.
6. Income
------
All income, including interest and dividends, earned on the Escrow Fund
deposited hereunder (hereinafter called the "Income") shall be added to and held
in the Escrow Account created hereunder.
7. Tax Identification Number
---------------------------
All interest accrued in the Escrow Fund shall be for the account of
_________________ and shall be reported under applicable federal regulations
using the tax identification number of ___________________________, which is
#_____________________________.
8. Indemnification as to Taxes, Penalties and Interest
---------------------------------------------------------
____________________ shall indemnify and hold harmless the Escrow Agent against
and in respect of any liability for taxes and for any penalties or interest in
respect of taxes attributable to the investment of funds held in escrow by
Escrow Agent pursuant to this Agreement.
9. Amendment
---------
This Agreement may not be amended or supplemented and no provision hereof may be
modified or waived, except by an instrument in writing, signed by all of the
parties hereto.
F - 3
<PAGE>
10. Termination
-----------
The purpose of this Escrow Agreement and the terms hereof shall terminate on the
earlier of ____________________or _______________________. Upon the termination
of this Agreement and upon the delivery of all or any portion of the Escrow
Funds by the Escrow Agent, in accordance with the terms hereof, the Escrow Agent
shall be relieved of any and all further obligations hereunder.
11. Resignation
-----------
The Escrow Agent may resign at any time by giving thirty (30) days written
notice of such resignation to _____________________________. If no successor
Escrow Agent has been named at the expiration of the thirty (30) day period, the
Escrow Agent shall have no further obligation hereunder except to hold the
Escrow Funds as a depository. Upon notification by __________________ of the
appointment of the successor, the Escrow Agent shall promptly deliver the Escrow
Fund and all materials in its possession relating to the Escrow Fund to such
successor, and the duties of the resigning Escrow Agent shall thereupon in all
respects terminate, and it shall be released and discharged from all further
obligations hereunder. Similarly, the Escrow Agent may be discharged from its
duties as Escrow Agent under this Agreement upon thirty (30) days written notice
from _________________________ and upon payment of any and all fees due to
Escrow Agent. In such event, the Escrow Agent shall be entitled to rely on
instructions from ___________________ as to the disposition and delivery of the
Escrow Fund.
12. Execution
---------
This Agreement may be executed in several counterparts, each of which shall be
deemed an original, but such counterparts together shall constitute one and the
same instrument. The effective date of this Agreement shall be the date it is
executed by the last party to do so.
13. Miscellaneous
-------------
All covenants and agreements contained in this Agreement by or on behalf of the
parties hereto shall bind and inure to the benefit of such parties and their
respective heirs, administrators, legal representatives, successors and assigns,
as the case may be. The headings in this Agreement are for convenience of
reference only and shall neither be considered as part of this Agreement, nor
limit or otherwise affect the meaning hereof. This Agreement shall be construed
and enforced in accordance with the laws of ________________________.
14. Notices
-------
All instructions, notices and other communications hereunder must be in writing
and shall be deemed to have been duly given if delivered by hand or mailed by
first class, registered mail, return receipt requested, postage prepaid, and
addressed as follows:
F - 4
<PAGE>
(a) If to ________________________________________________
(b) If to ________________________________________________
(c) If to the Escrow Agent:
IN WITNESS THEREOF, the parties hereto have duly executed this Agreement as of
the date first above written.
(NAME OF COMPANY)
By: ___________________________
Name: _________________________
Title: ________________________
as (ESCROW AGENT)
By: ___________________________
Name: _________________________
Title: ________________________
F - 5
<PAGE>
AMENDMENT NO. 2 TO LEASE/INSTALLMENT PURCHASE AGREEMENT
FOR TWO (2) 15-MILE PIPELINES DATED NOVEMBER 24, 1998 AND TO LEASE/INSTALLMENT
AGREEMENT FOR TWO (2) 10-KILOMETER PIPELINES
This agreement (hereinafter referred to as the "Amendment") is made and
entered into as of July ____, 1999 by and between PENN OCTANE CORPORATION, a
Delaware corporation (hereinafter referred to as "POC") and CPSC INTERNATIONAL,
a Texas corporation (hereinafter referred to as "CPSC") (collectively referred
to as the "Parties" and individually referred to as a "Party" where either POC
or CPSC could apply). This Amendment modifies that certain Lease/Installment
Purchase Agreement For Two (2) 15-Mile Pipelines, dated November 24, 1998, as
well as that certain Lease/Installment Purchase Agreement For Two (2)
10-Kilometer Pipelines, dated _________________, 1998 (hereinafter both
agreements referred to as the "Agreements").
WHEREAS, pursuant to the terms and conditions of the Agreements, the
Parties have previously agreed, among other things, that POC shall provide as
security for payments due to CPSC under the Agreements a Letter of Credit in the
total amount of $942,000 for the benefit of CPSC, and
WHEREAS, the Parties now agree to amend said security provisions in the
Agreements, and CPSC agrees to accept, and POC agrees to provide, a pledge into
escrow 500,000 shares of POC common stock currently owned and held by Jerome B.
Richer (hereafter referred to as the "Shares"), as security in place of the
Letter of Credit initially contemplated and agreed to by the Parties in the
Agreements.
NOW, THEREFORE, in consideration of the mutual promises set forth herein,
the Parties hereby agree as follows:
1. Amendment. Section 3.3 of the Agreements setting forth the
---------
requirement of a Letter of Credit is hereby amended as follows:
3.3 Common Stock Pledge. POC shall provide or arrange to provide a pledge
---------------------
of 500,000 shares of common stock currently owned and held by Jerome B. Richter,
President of POC (hereinafter referred to as the "Shares"). POC agrees to have
the Shares placed into an escrow account and accessible to CPSC in the case of
default pursuant to the terms and conditions specifically set forth herein and
in that certain Escrow Agreement to be executed by the Parties. In the event of
default in payment from POC, CPSC may call on the Shares in lieu of payment for
the full amount of the payment in default, with the released Shares to be valued
as of the time of release from the escrow account. Said valuation will
determine how many Shares will be released from the escrow account to satisfy
the default.
<PAGE>
2. Escrow. The Parties agree that the Shares shall be placed in escrow
------
upon the execution of this Amendment and maintained thereafter pursuant to the
escrow agreement to be entered into between the Parties.
3. Partial Release of Collateral. In the event that the fair market
--------------------------------
price per share of the POC common stock rises above $3.00 per share, the Parties
agree to negotiate in good faith to a partial release of said Shares as
collateral to the extent the fair market value of the Shares exceeds $942,000
and to direct such instructions to the Escrow Agent.
4. Substitution of Collateral. Upon the completion of the pipeline by
---------------------------
CPSC, POC shall at the end of every month for ten (10) months thereafter place
$100,000 into an escrow account to act as substitute security for CPSC in place
of the Escrow Shares. Immediately after the initial monthly installment is made
by POC, POC and CPSC agree to instruct the Escrow Agent to return to POC the
Escrow Shares pledged upon the execution of this Amendment up to the value of
the cash deposited. At the end of the ten (10) month period of payments, POC
shall, at its sole discretion, either maintain $942,000 from the funds
previously deposited in the account or establish a letter of credit in the
amount of $942,000 to act as substitute collateral for the remainder of the term
of Agreements. In either event, all remaining Escrow Shares will be released
back to Jerome B. Richter.
5. Additional Collateral. In the event that, during such time that all
---------------------
the Shares remain in the escrow account, the fair market value of the Shares
drops below $2.00 per share, CPSC shall have the option to request POC to
deposit additional POC common stock into the escrow account to maintain a total
fair market value of $942,000 for the Shares held in said escrow account.
IN WITNESS WHEREOF, each of the Parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
CPSC: POC:
CPSC INTERNATIONAL PENN OCTANE CORPORATION
BY:_________________________ BY:____________________________
Eric B. DuBose, President J.B. Richter, President
Page -2-
<PAGE>
AGREEMENT
---------
This Agreement is entered into on September 16, 1999 by and between CPSC
INTERNATIONAL, INC., a Texas corporation ("CPSC") and PENN OCTANE CORPORATION, a
Delaware corporation ("POC") on the terms and conditions set forth below.
1. POC hereby agrees to purchase from CPSC at a purchase price of Three
Million Dollars ($3,000,000.00), a thirty percent (30%) interest in those two
(2) certain Lease/Installment Purchase Agreements (including all amendments,
modifications, extensions and revisions thereof) between POC and CPSC (hereafter
referred to as "CPSC Pipeline Agreements") involving the construction and
leasing of two (2) fifteen (15) mile and two (2) seven (7) mile pipelines in
South Texas and Mexico respectively which are subject to a preexisting agreement
between the Parties. Said Purchase Price will be due and payable the later of
ten (10) days after the Substantial Completion Date as defined in by CPSC
Pipeline Agreements or January 3, 2000. Said payment date is hereinafter
referred to as the "Closing Date." In no event shall POC have any obligation to
contribute to CPSC's expenses in reaching the Substantial Completion Date. CPSC
warrants and represents that POC's purchase of at thirty percent (30%) interest
shall generate a minimum of Fifty-Four Thousand Dollars ($54,000.00) per month
in POC income provided that the lessee is not in default under the lease. The
purchase of a fifty percent (50%) interest will generate a guaranteed minimum
income to POC of Ninety Thousand Dollars ($90,000.00) provided that the lessee
is not in default under the lease.
2. To secure payment of the Three Million Dollar ($3,000,000.00) Purchase
Price, POC will assign its rights to the proceeds (subject to a preexisting
attorney's lien) of the pending Judgment in International Energy Development
Corporation vs. International Bank of Commerce-Brownsville entered on February
28th 1996 by the 197th Judicial District of Cameron County, Texas Civil Action #
94-08-4008-C (the "Judgment"). To the extent POC's interest in the Judgment is
less than the full Purchase Price, POC will make up the difference on the
Closing Date. In the event POC's interest in the Judgment is of a value in
excess of the Purchase Price, the excess will be paid to POC. In the event the
Judgment is not paid by the Closing Date, at the election of CPSC, POC will make
immediate payment of the Purchase Price within five days of CPSC's election and
the assignment of the Judgment will be returned to POC. At CPSC's election,
which shall be made within ten (10) days of the Substantial Completion Date,
CPSC may instead keep the Judgment and apply it to the Purchase Price rather
than demand payment, provided, however, any Judgment amount in excess of Three
Million Dollars ($3,000,000.00) will remain the property of POC. Upon said
election, CPSC shall be entitled to any and all interest accumulating on the
first Three Million Dollars ($3,000,000.00) of the Judgment.
3. In return for an immediate payment of Fifty Thousand Dollars
($50,000.00), POC shall have the option for ninety (90) days after the Closing
Date to purchase an additional twenty percent (20%) interest in the CPSC
Pipeline Agreements from CPSC for an additional payment of Two Million Dollars
($2,000,000.00). POC shall have a second, separate and additional option to
purchase an additional fifty percent (50%) interest in the CPSC pipeline from
CPSC within ninety (90) days after the Closing Date for an additional payment
of Seven Million Dollars ($7,000,000.00). In the event POC exercises both of
these options, CPSC's entire interest in the CPSC Pipeline Agreements will have
been purchased by POC.
4. POC shall retain all other options to purchase CPSC's interest in the
CPSC Pipeline Agreements as set forth in said agreements, provided that the
Purchase Price of those options will be adjusted to reflect POC's purchase(s) of
CPSC's interest on a percentile basis.
5. Although the Parties intend to negotiate in good faith to reach a more
definitive agreement, in the absence of a further written agreement, this
agreement shall be binding and controlling.
6. In the event of bringing any action or suit by a party hereto by reason
of any breach of this agreement, the prevailing party shall be entitled to
recover all costs and expenses of that action or suit, arbitration, trial and on
appeal as well as in collection of Judgment, including reasonable attorney's
fees, accounting, and other professional fees resulting there from.
"POC" "CPSC"
- --------------------------- --------------------------
Penn Octane Corporation CPSC International, Inc.
By: Jerry Richter By: Eric DuBose
Title: President Title: President
<PAGE>
PURCHASE, SALE AND SERVICE AGREEMENT
FOR PROPANE/BUTANE MIX
KING RANCH GAS PLANT
This Purchase, Sale and Service Agreement for Propane/Butane Mix ("AGREEMENT")
is entered into effective as of October 1, 1999 by and between Exxon Company,
U.S.A. (a division of Exxon Corporation), a New Jersey Corporation ("EXXON") and
Penn Octane Corporation, a Delaware corporation "(POC").
RECITALS
A. Exxon currently owns and operates the King Ranch Gas Plant which
processes gas for the extraction of certain products, including propane and
butane. Exxon desires to sell to POC a propane/butane mix produced at the Plant
and to arrange for or provide to POC certain transportation, pumping and
blending services. Exxon has agreed to install additional facilities and/or
equipment at the Plant to enable Exxon to provide such pumping and blending
services.
B. POC intends to enter into contracts with suppliers in the Corpus Christi
area to purchase additional propane to deliver to the King Ranch Gas Plant for
blending with Exxon's equity propane and butane.
C. Exxon Pipeline Company owns an idle twelve-inch (12") pipeline that runs
from Corpus Christi to the King Ranch Gas Plant and has agreed with Exxon, under
certain conditions set forth in this Agreement and in a separate agreement
between Exxon and Exxon Pipeline Company, to make necessary modifications to
this pipeline and to make this pipeline available for propane delivery service.
D. POC owns a terminal in Brownsville, Texas and holds a long term lease on
a six-inch (6") pipeline (which is defined as the Ella-Brownsville Pipeline in
Article 1) that runs from the King Ranch Gas Plant to its Brownsville terminal.
POC desires to purchase a propane/butane mix from Exxon and to use this six-inch
(6") pipeline to deliver such mix from the King Ranch Gas Plant to the
Brownsville terminal.
E. POC is currently constructing a pipeline from POC's Brownsville terminal
to a terminal that POC is also constructing in Matamoros, Mexico.
F. POC has entered into contracts to sell the propane/butane mix to Pemex
and/or a group of LPG resellers in Northeast Mexico.
G. Exxon and POC desire to enter into this Agreement to document their
agreements with respect to transportation, pumping and blending services to be
provided directly or indirectly by Exxon and the terms and conditions under
which Exxon will make capital investments in the Plant and contract with EPC to
make capital investments and long term volume commitments, and under which Exxon
will sell and POC will purchase the propane/butane mix.
1
<PAGE>
AGREEMENTS
Now, therefore, for and in consideration of the premises, mutual covenants, and
agreements contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Exxon and POC hereby agree as follows:
ARTICLE 1
Definitions
-----------
1.1 Definitions. For the purposes of this Agreement, the following terms
-----------
shall have the designated meanings set forth below:
"AFFILIATE" shall mean an affiliated or subsidiary corporation or other legal
entity that is owned or controlled by a Party or any affiliated or subsidiary
corporation or other legal entity that is owned or controlled by its parent or
related entity. As used in this definition, "owned or controlled by" means owns
or holds the right to vote fifty percent (50%) or more of the stock of the
entity. In the case of POC, the term "Affiliate" shall also include POC's
affiliated entity, Penn Octane Mexico; any reference in this Agreement to Penn
Octane Mexico shall include any successor entity.
"ALTERNATE DELIVERY POINT(S)" shall mean either the point of connection between
the Plant and the Ella-Seadrift Pipeline at Ella-Seadrift Propane Meter #5 or
the point of connection between the Plant and the Dean Pipeline at Dean Propane
Meter #6, or both, as elected by POC pursuant to Section 5.2.
"ASTM" shall mean the American Society for Testing and Materials.
"BARREL" shall mean a barrel of forty-two (42) United States gallons at sixty
degrees Fahrenheit (60 F) and at equilibrium vapor pressure of the liquid.
"BUSINESS DAY" shall mean a calendar day exclusive of Saturdays, Sundays and
legal holidays.
"BUTANE INDEX PRICE" shall mean the price determined monthly by calculating the
simple arithmetic average of the non-TET low normal butane price for Mt. Belvieu
for all days prices are published by OPIS during the applicable Delivery Month.
"CALENDAR YEAR" shall mean each twelve (12) month period beginning at 7:00 a.m.,
local time, on the first day of January and ending at 7:00 a.m., local time, on
the first day of January of the next succeeding year.
"CCPL PROPANE METER #2" shall mean the custody transfer meter located at the
point of connection from the CCPL to the Plant which is identified as Meter #2
on Exhibit "C". Such meter measures the POC Propane delivered to the Plant
through the CCPL.
"CORPUS CHRISTI PIPELINE" or "CCPL" shall mean the twelve-inch (12") pipeline
currently owned by EPC which generally runs from the Coastal Corporation meter
station in Nueces County, Texas near the city of Corpus Christi to the inlet of
the King Ranch Gas Plant.
2
<PAGE>
"DAY" shall mean a period of twenty-four (24) consecutive hours commencing at
7:00 a.m., local time.
"DEAN PIPELINE" shall mean the six-inch (6") pipeline currently owned by Duke
Energy NGL Services, Inc. which connects to the Plant and generally runs north
from the Plant to Mt. Belvieu.
"DEAN PROPANE METER #6" shall mean the meter located at the point of connection
from the Plant to the Dean Pipeline which is identified as Meter #6 on Exhibit
"C". Such meter measures the Exxon Equity Propane delivered to the Dean
Pipeline on an emergency basis.
"DELIVERY DEFICIENCY FEE" shall have the meaning set forth in Section 6.8.
"DELIVERY MONTH" shall mean a period of one (1) month commencing at 7:00 a.m.,
local time, on the first day of a calendar month and ending at 7:00 a.m., local
time, on the first day of the next succeeding month.
"DELIVERY POINT" shall mean the point of connection between the outlet of the
Plant shipping station and the Ella-Brownsville Pipeline.
"DELIVERY WEEK" shall mean a period of one (1) week commencing at 7:00 a.m.,
local time, on each Monday and ending at 7:00 a.m., local time, on Monday of the
next succeeding week.
"EFFECTIVE DATE" shall mean October 1, 1999.
"ELLA-BROWNSVILLE PIPELINE" shall mean the six-inch (6") pipeline currently
owned by Union Carbide Company and leased to POC which generally runs from the
Plant to the POC terminal located in Brownsville, Texas.
"ELLA-BROWNSVILLE PIPELINE CAPACITY" shall mean the maximum capacity from time
to time available in the Ella-Brownsville Pipeline. As of the Effective Date,
the maximum capacity is sixteen thousand Barrels per day (16kbd) at a pressure
of one thousand seven hundred fifty (1750) Psig.
"ELLA-SEADRIFT PIPELINE" shall mean the eight-inch (8") pipeline currently owned
by Union Carbide Company which generally runs from the Plant to the Markham Dome
storage facility.
"ELLA-SEADRIFT PROPANE METER #3" shall mean the meter located at the point of
connection from the Ella-Seadrift Pipeline to the Plant which is identified as
Meter #3 on Exhibit "C". Such meter measures the POC Propane delivered to the
Plant on an emergency basis.
"ELLA-SEADRIFT PROPANE METER #5" shall mean the meter located at the point of
connection from the Plant to the Ella-Seadrift Pipeline which is identified as
Meter #5 on Exhibit "C". Such meter measures the Exxon Equity Propane delivered
to the Ella-Seadrift Pipeline on an emergency basis.
"EPC" shall mean Exxon Pipeline Company, a wholly owned subsidiary of Exxon
Corporation.
3
<PAGE>
"EPC TARIFF" shall mean the Exxon Pipeline Company Texas RRC Tariff No. 494 for
the Corpus Christi Pipeline on file from time to time with the Texas Railroad
Commission or other regulatory body having jurisdiction over the Corpus Christi
Pipeline pursuant to which propane is transported for shippers.
"EXXON EQUITY BUTANE" shall mean the volume of butane produced at the Plant
which is owned or controlled by Exxon and which meets the specifications set
forth in Exhibit "A".
"EXXON EQUITY PRODUCT" shall mean the portion of the Mix produced at the Plant
consisting of (a) the volume of Exxon Equity Propane measured at Plant Propane
Meter #1, (b) the volume of Exxon Equity Propane measured at Ella-Seadrift
Propane Meter #5 or Dean Propane Meter #6, or both, if POC elects to receive
propane at the Alternate Delivery Points, and (c) the volume of Exxon Equity
Butane measured at Plant Butane Meter #4. The term "Exxon Equity Product" shall
specifically exclude POC Propane.
"EXXON EQUITY PROPANE" shall mean the volume of propane produced at the Plant
which is owned or controlled by Exxon and which meets the specifications set
forth in Exhibit "A".
"GALLON" shall mean a United States gallon of two hundred thirty one (231) cubic
inches of liquid at sixty degrees Fahrenheit (60 F) and at the equilibrium vapor
pressure of the liquid.
"KB" shall mean one thousand Barrels.
"KBD" shall mean thousand Barrels per day.
"LPG" shall mean liquefied petroleum gas.
"MATAMOROS AVERAGE MIX PRICE" shall mean the average of all Matamoros-into-truck
or tank-car wholesale prices (indexed to Mt. Belvieu and expressed in United
States dollars) included in term contracts of one (1) year or longer between POC
(or its Affiliate, Penn Octane Mexico) and its LPG resellers in Northeast Mexico
for deliveries of Mix FOB Matamoros. Contracts for delivery of Mix under terms
other than FOB Matamoros shall be included in the calculation of the Matamoros
Average Mix Price; provided, however, the actual transportation costs from
Matamoros to the delivery point and the actual costs of operating any terminal
at remote delivery points, if any, shall be deducted from such contract prices.
"MAXIMUM DELIVERY VOLUME" shall mean a volume for a particular time period equal
to the difference between the Ella-Brownsville Pipeline Capacity for such period
and the sum of the Exxon Equity Propane measured at Plant Propane Meter #1
during such period and the Exxon Equity Butane measured at Plant Butane Meter #4
during such period. Expressed as a formula: Maximum Delivery Volume =
Ella-Brownsville Pipeline Capacity - (Exxon Equity Propane + Exxon Equity
Butane).
"MB" shall mean one million Barrels.
4
<PAGE>
"METER" shall mean, as applicable, any one or a combination of the following
meters, each of which is more particularly defined in this Agreement and
identified on Exhibit "C" by the corresponding meter number:
Plant Propane Meter #1
CCPL Propane Meter #2
Ella-Seadrift Propane Meter #3
Plant Butane Meter #4
Ella-Seadrift Propane Meter #5
Dean Propane Meter #6
"MINIMUM DELIVERY VOLUME" shall have the meaning set forth in Section 4.5.
"MINIMUM PURCHASE VOLUME" shall have the meaning set forth in Section 5.2.
"MIX" shall mean a blend of approximately _________ propane and _________ butane
meeting the quality specifications set forth in Exhibit "A". The term "Mix"
includes Exxon Equity Propane, Exxon Equity Butane, and POC Propane.
"MT. BELVIEU" shall mean that industry natural gas liquids fractionation,
storage and distribution area located on the Barbers Hill salt dome in Chambers
County, Texas, and commonly referred to in the industry as "Mt. Belvieu".
"MT. BELVIEU PRICE DIFFERENTIAL" shall mean the amount by which (a) the
Matamoros Average Mix Price exceeds (b) the composite of the Propane Index Price
and the Butane Index Price included in a mix of ________% propane/butane.
Expressed as a formula: Mt. Belvieu Price Differential = Matamoros Average Mix
Price - [(Propane Index Price x ___) + (Butane Index Price x ___)].
"OPIS" shall mean Oil Price Information Service.
"PARTY" shall mean either Exxon or POC.
"PARTIES" shall mean collectively, Exxon and POC.
"PIPELINE DELIVERY FEE" shall mean the fee which POC shall pay to Exxon for the
transportation of POC Propane on the CCPL from the Receipt Point(s) to the
Plant. The Pipeline Delivery Fee shall be calculated pursuant to Section 6.5.
"PLANT" or "KING RANCH GAS PLANT" shall mean the King Ranch gas plant currently
owned by Exxon and located in Kleburg County, Texas.
"PLANT BUTANE METER #4" shall mean the meter identified as Meter #4 on Exhibit
"C" which measures the volume of Exxon Equity Butane included in the Exxon
Equity Product."
5
<PAGE>
PLANT PROPANE METER #1" shall mean the meter identified as Meter #1 on Exhibit
"C" which measures a portion of the volume of Exxon Equity Propane included in
the Exxon Equity Product.
"POC PROPANE" shall mean the total volume of propane delivered by POC and
received by Exxon at the Plant as measured at CCPL Propane Meter #2 and, on an
emergency basis, at Ella-Seadrift Meter #3.
"PRODUCT FEE" shall mean the fee which POC shall pay to Exxon for the Exxon
Equity Product delivered, as calculated pursuant to Section 6.2.
"PRODUCT PRICE" shall mean the price on which the Product Fee is calculated.
The "Product Price" shall be based on the Propane Index Price and the Butane
Index Price, subject to decreases for discounts pursuant to Section 6.2(a) and
increases for premiums pursuant to Section 6.2(b). The "Product Price" is
subject to a one-time redetermination pursuant to Section 6.3.
"PROPANE INDEX PRICE" shall mean the propane price determined monthly by
calculating the simple arithmetic average of the non-TET propane price for Mt.
Belvieu for all days prices are published by OPIS during the applicable Delivery
Month.
"PUMPING AND BLENDING FEE" shall mean the fee which POC shall pay to Exxon for
the pumping and blending services provided pursuant to this Agreement. The
Pumping and Blending Fee shall be calculated pursuant to Section 6.6.
"PUMPING AND BLENDING DEFICIENCY FEE" shall have the meaning set forth in
Section 6.7.
"PUMPING AND BLENDING MINIMUM VOLUME" shall have the meaning set forth in
Section 4.2.
"PURCHASE DEFICIENCY FEE" shall have the meaning set forth in Section 6.9.
"PSIG" shall mean pounds per square inch, gauge.
"RECEIPT POINT(S)" shall mean the custody transfer meter or meters generally
located near EPC's Viola Pump Station in Nueces County, Texas for each supplier
with which POC contracts to purchase propane for shipment in the CCPL, which
meters are owned or operated, or both, by POC or its suppliers.
"TERM" shall have the meaning set forth in Section 2.1.
ARTICLE 2
Term
----
2.1 Term The initial term of this Agreement shall commence on the
----
Effective Date and shall continue through September 30, 2009. This Agreement
shall thereafter automatically be renewed on a year-to-year basis until written
notice of termination is given by either Party at least twelve (12) months prior
to the end of the initial term or any subsequent renewal term. The initial term
of this Agreement, as renewed from time to time, shall be referred to as the
"TERM".
6
<PAGE>
2.2 Termination POC agrees that Exxon is not required to operate
-----------
the Plant solely for the purpose of blending or delivering Mix. If at any time
during the Term Exxon elects not to continue operations of the Plant for any
reason, including without limitation a determination, in Exxon's sole
discretion, that operation of the Plant has become uneconomical, then Exxon may
terminate this Agreement effective on the date the Plant ceases operations by
providing written notice to POC at least six (6) months in advance. If, prior
to the time Exxon is required to give such notice, Exxon determines that it may
cease operations of the Plant, Exxon will make a good faith attempt to verbally
advise POC of such determination.
ARTICLE 3
Conditions Precedent
--------------------
3.1 Conditions Precedent to Exxon's Obligations The obligations of
--------------------------------------------
Exxon to provide or arrange for transportation, pumping and blending services
under this Agreement are expressly made subject to the following conditions
precedent:
(a) Corpus Christi Pipeline Exxon shall contract with EPC to
-------------------------
recommission the idle CCPL for propane delivery service with a minimum operating
capacity of _____________________ Barrels per day (_____bd). Exxon's contract
with EPC shall include a provision that EPC will file a bi-directional tariff
between the Plant and Corpus Christi of ___________ ($_____) per Barrel. If for
any reason (i) the EPC Tariff is not approved for ______________ ($ ______) and
if the Parties are unable to agree upon another mutually acceptable amount for
the EPC Tarriff, (ii) EPC is unable to obtain rights-of-way or permits for the
CCPL, or (iii) the hydrotest of the CCPL indicates that EPC will not be able to
recommission such line at a total cost of ___________________ dollars
($______________) or less, Exxon shall have the right to terminate the
provisions of Article 4 of this Agreement upon giving POC written notice of
termination, in which event POC's corresponding obligations to pay the Pipeline
Delivery Fee under Section 6.5, the Pumping and Blending Fee under Section 6.6,
the Pumping and Blending Deficiency Fee under Section 6.7, and the Delivery
Deficiency Fee under Section 6.8 shall also be terminated. The remainder of the
Agreement shall continue in full force and effect.
(b) Plant Shipping Station Modifications Exxon shall, at its
--------------------------------------
sole cost and expense, install additional facilities and/or equipment at the
Plant sufficient to give the Plant the capacity to (i) receive up to
______________Barrels per day (____bd) of propane from the CCPL, (ii) blend POC
Propane, Exxon Equity Propane, and Exxon Equity Butane into Mix, and (iii)
deliver a minimum of _________________Barrels per day (___bd) of Mix into the
Ella-Brownsville Pipeline at a pressure not to exceed one thousand seven hundred
fifty (1750) Psig.
(c) Extension of Time Timing for recommisioning the idle CCPL under
-------------------
Section 3.1(a) and for modifications of the Plant under Section 3.1(b) is
targeted for October 1, 1999, however, such date may be extended if any delay is
a result of delayed right-of-way acquisition or other matters which are not
reasonably within the control of Exxon or EPC or if otherwise mutually agreed by
the Parties. If the recommissioning of the CCPL and the Plant modifications
are not completed and operational by October 1, 1999, then the obligations of
the Parties under Article 4 (and POC's corresponding payment obligations under
Sections 6.5, 6.6, 6.7 and 6.8) shall be suspended until the Day on which the
CCPL and Plant modification work is completed and operational. No such
extension shall suspend or otherwise affect any obligations under Article 5 or
any other provision of this Agreement.
7
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ARTICLE 4
Pumping, Blending and Pipeline Delivery Services
------------------------------------------------
4.1 Pumping and Blending Services
--------------------------------
The Parties acknowledge that as part of its normal Plant operations, Exxon will
produce Exxon Equity Propane and Exxon Equity Butane, which products will be
used in the process of blending Mix. POC shall acquire and deliver to Exxon POC
Propane in accordance with Section 4.3 below. Exxon shall provide sufficient
Exxon Equity Butane at the Plant to convert the POC Propane received from the
CCPL and the Ella-Seadrift Pipeline to Mix specifications. Exxon shall blend
Exxon Equity Propane and POC Propane, as applicable, with Exxon Equity Butane at
the Plant into Mix in accordance with the specifications set forth in Exhibit
"A" and shall pump such Mix into the Ella-Brownsville Pipeline; provided,
however, Exxon shall not be obligated to deliver Mix at a rate or pressure which
would result in deliveries at either a pressure in excess of one thousand seven
hundred fifty (1750) Psig or at a rate in excess of _______________ Barrels per
day (____bd). It is understood and agreed that Exxon Equity Propane shall have
first priority over POC Propane for blending and that Exxon shall utilize all
Exxon Equity Propane before accepting POC Propane for blending.
4.2 Pumping and Blending Minimum Volume During each of the periods
---------------------------------------
designated below, POC agrees to deliver for blending and pumping by Exxon, and
Exxon agrees to receive and to provide the blending and pumping services for,
the following minimum total volumes of POC Propane ("PUMPING AND BLENDING
MINIMUM VOLUME"):
(a) During the Calendar Year 2000, _________________ Barrels (______b);
and
(b) During the Calendar Year 2001 and during each Calendar Year through
the remainder of the Term, ________________ Barrels (____ Mb) per Calendar Year.
If the Term expires or is terminated on a Day other than the last Day of a
Calendar Year, the Pumping and Blending Minimum Volume shall be prorated on a
twelve (12) month basis. If POC fails to deliver the Pumping and Blending
Minimum Volume for any applicable period, then POC shall pay to Exxon the
Pumping and Blending Deficiency Fee in accordance with Section 6.7.
4.3 POC Propane Receipts POC shall contract with third party suppliers
----------------------
in the Corpus Christi area to purchase propane from time to time in sufficient
quantities to enable POC to meet its Minimum Delivery Volume obligations under
Section 4.5. The maximum volume of POC Propane which Exxon is obligated to
receive from time to time during the Term shall be ninety percent (90%) of the
Maximum Delivery Volume. The Parties acknowledge that the volume of POC Propane
accepted by Exxon will vary periodically based on the amount of Exxon Equity
Propane produced at the Plant. Exxon will provide to POC on or before the fifth
(5th) Business Day before each Delivery Month its monthly projections for
8
<PAGE>
production rates of Exxon Equity Propane and Exxon Equity Butane. The monthly
projections are only intended to reflect expected operations at the Plant and
shall not be construed as binding upon the Parties. The Parties will, from time
to time, agree upon mutually acceptable operating procedures for communicating
any routine or emergency changes in or variations from these projected monthly
propane and butane production rates.
4.4 Pipeline Delivery Services Exxon, under separate contract with EPC,
---------------------------
shall arrange for receipt and transportation of up to _____________ Barrels per
day (___bd) of POC Propane into the CCPL. Exxon shall pay to EPC the applicable
EPC Tariff for the volumes of POC Propane transported on the CCPL, and POC shall
pay to Exxon the applicable Pipeline Delivery Fee. POC agrees to deliver to EPC
the POC Propane at the Receipt Point(s), and upon each delivery, POC represents
and warrants to Exxon and EPC that (a) POC owns or controls the propane so
delivered or otherwise has the right to deliver the propane for shipment and
blending, and (b) the propane so delivered is in compliance with the
specifications set forth in the EPC Tariff. Custody of the POC Propane shall
transfer to EPC at the Receipt Point(s); however, title and risk of loss and
damage to the POC Propane shall remain with POC. POC hereby agrees to comply
with all of the terms and provisions of any EPC Tariff in effect from time to
time during the Term.
4.5 Minimum Delivery Volume During each of the periods designated below,
-----------------------
POC agrees to deliver for transport on the CCPL, and Exxon agrees to arrange for
the receipt and transport of, the following minimum total volumes of POC Propane
("MINIMUM DELIVERY VOLUME"):
(a) During the fourth quarter of 1999, `a total volume of
_______________ Barrels (____b);
(b) During the Calendar Year 2000, _____________________ Barrels (______b)
at the following quarterly rates: during the first quarter,
______________________ Barrels (____b); during the second quarter,
_____________________ Barrels (_____b); during the third quarter,
_________________ Barrels (_____b); and during the fourth quarter,
________________ Barrels (_____b); and
(c) During the Calendar Years 2001 through 2004, __________________ Barrels
(_____b) per Calendar Year.
If the Term expires or is terminated on a Day other than the last Day of a
Calendar Year, the Minimum Delivery Volume shall be prorated on a twelve (12)
month basis. If POC fails to deliver the Minimum Delivery Volume for any
applicable period, then POC shall pay to Exxon the Delivery Deficiency Fee in
accordance with Section 6.8.
4.6 Minimum Volume Credits
------------------------
(a) Minimum Delivery Volume Any volume of POC Propane delivered in
------------------------
excess of the Minimum Delivery Volume for a particular period shall be carried
forward as a credit towards the Minimum Delivery Volume for the next succeeding
period. If POC makes POC Propane available at the Receipt Point(s) and Exxon or
EPC limits propane receipts from POC in accordance with Section 4.8, then the
total volume so limited shall be credited to POC's Minimum Delivery Volume as if
the propane volume had actually been transported. In addition, if for any
9
<PAGE>
reason the Maximum Delivery Volume calculated for a particular period is less
than the Minimum Delivery Volume for the corresponding period, then a volume
equal to the positive difference, if any, between the Minimum Delivery Volume
and the Maximum Delivery Volume shall be credited to POC's Minimum Delivery
Volume for such period as if the propane volume had actually been transported.
(b) Pumping and Blending Minimum Volume Any volume of POC Propane
---------------------------------------
delivered in excess of the Pumping and Blending Minimum Volume for a particular
period shall be carried forward as a credit towards the Pumping and Blending
Minimum Volume for the next succeeding period. If POC makes POC Propane
available at the Receipt Point(s) and Exxon or EPC limits propane receipts from
POC in accordance with Section 4.8, then the total volume so limited shall be
credited to POC's Pumping and Blending Minimum Volume as if the propane volume
had actually been transported. In addition, if for any reason ninety percent
(90%) of the Maximum Delivery Volume calculated for a particular period is less
than the Pumping and Blending Minimum Volume for the corresponding period, then
a volume equal to the positive difference, if any, between the Pumping and
Blending Minimum Volume and ninety percent (90%) of the Maximum Delivery Volume
shall be credited to POC's Pumping and Blending Minimum Volume for such period
as if the propane volume had actually been transported.
4.7 Third Party Suppliers Either POC or its third party suppliers,
----------------------
at no cost to Exxon or EPC, shall provide the necessary connections to the CCPL
in a manner acceptable to and approved by EPC, and shall provide metering and
delivery pressure necessary to deliver propane to the Plant at a pressure of
five hundred (500) Psig. Exxon or EPC shall provide CCPL Propane Meter #2,
which meter will be used for measurement and calculation of the Pipeline
Delivery Fee and the Pumping and Blending Fee (for the portion of the POC
Propane received from the CCPL). On an emergency basis, POC may deliver POC
Propane to Exxon on the Ella-Seadrift Pipeline. Any such emergency deliveries
shall be made at a minimum pressure of five hundred (500) Psig. POC shall
advise the Plant's foreman for product receipts by telephone prior to any
emergency deliveries. Exxon shall provide Ella-Seadrift Propane Meter #3, which
meter will be used for measurement and calculation of the Pumping and Blending
Fee for the portion of the POC Propane received from the Ella-Seadrift Pipeline.
Both CCPL Propane Meter #2 and Ella-Seadrift Propane Meter #3 may be used by POC
as check meters for its third party propane receipts. POC shall be responsible
for resolving any metering disputes and any product quality issues with its
third party suppliers on propane volumes delivered to the Plant on the CCPL and
the Ella-Seadrift Pipeline. Any allocations of receipts from such suppliers
shall be the sole responsibility of POC.
4.8 Exxon's Reservation Exxon expressly reserves the right to utilize
--------------------
its contracted capacity on the CCPL to transport Exxon Equity Propane on the
CCPL from the Plant to Corpus Christi to respond to emergency Plant operating
requirements which may result from the loss of other pipeline outlets for
propane, or from any other event which may limit Exxon's ability to deliver the
Plant's full Exxon Equity Propane or Exxon Equity Product production from the
Plant. Exxon shall advise POC as soon as reasonably possible of the occurrence
of any such events. Exxon shall have no liability whatsoever to POC or to any
third party for the exercise of the rights expressly reserved in this Section
4.8.
10
<PAGE>
ARTICLE 5
Purchase and Sale of Mix
------------------------
5.1 Product and Quantity Subject to the limitations and further
----------------------
obligations set forth in this Article 5, Exxon agrees to sell and deliver to POC
and POC agrees to purchase and receive from Exxon, ________ volume of Exxon
Equity Product produced at the Plant which Exxon has the right to sell at any
given time during the Term up to a maximum volume of ____________ Barrels per
day (____bd). Exxon will communicate to POC by telephone with as much advance
notice as is reasonably practical of any changes in projected Exxon Equity
Propane and Exxon Equity Butane production rates. Exxon is not obligated to
sell or deliver a volume of Exxon Equity Product that exceeds ____________
(____%) of its owned and/or controlled share of Exxon Equity Product produced at
the Plant; and POC is not obligated to purchase Exxon Equity Product in excess
of its Mix sales into Mexico, except as expressly provided in Section 5.2 below.
Under no circumstances shall Exxon's obligations under this Agreement be
construed as requiring Exxon to purchase or acquire any propane or butane from
any third party source.
5.2 POC Minimum Purchase Obligation For each Delivery Month during
--------------------------------
the Term, POC agrees to purchase and receive, or pay for, if available for
delivery to POC but not taken, a daily volume of Exxon Equity Product (the
"MINIMUM PURCHASE VOLUME") in an amount equal to the lesser of (a)
_______________ Barrels per day (___bd) or (b) ____________ (____%) of Exxon's
owned and/or controlled share of Exxon Equity Product (expressed in Barrels).
POC will communicate by telephone to the Plant's foreman for product shipments
each morning any routine or emergency variations from its normal receipt
schedules at the Delivery Point. If for any reason POC cannot accept delivery
of the Minimum Purchase Volume at the Delivery Point, POC may elect to make
alternate arrangements for receipt of the Exxon Equity Propane purchased by POC
at the Alternate Delivery Point(s). Any volume of Exxon Equity Propane
purchased by POC and received at the Alternate Delivery Point(s) shall be
credited towards the Minimum Purchase Volume. POC shall promptly advise the
Plant's foreman for product shipments by telephone and in writing (within 24
hours) as to its election for use of the Alternate Delivery Point(s). If POC
fails to so advise Exxon, Exxon shall have the right, but not the obligation, to
arrange for alternate disposition of the Exxon Equity Propane, and POC shall
reimburse Exxon for all costs of such disposition pursuant to Section 6.9.
Exxon will use good faith efforts to minimize such alternate disposition costs.
5.3 Mix Delivery; Title
---------------------
(a) Delivery Point Exxon, or Exxon's designee, shall deliver
---------------
the Mix by pipeline at the Delivery Point. Title to (other than POC Propane to
which POC retains title), and risk of all loss of or damage to, the Mix shall
pass to POC at the Delivery Point, at which time POC shall be deemed to be in
possession and control of such Mix. Deliveries of Mix shall be made at a
reasonably constant rate and at a pressure sufficient to enter the
Ella-Brownsville Pipeline against the working pressure in the pipeline, as such
pressure may vary from time to time; provided, however, Exxon shall not be
obligated to deliver Mix at a rate or pressure which would result in deliveries
at a pressure in excess of one thousand seven hundred fifty (1750) Psig or at a
rate in excess of twenty thousand Barrels per day (20kbd).
(b) Alternate Delivery Point(s) If POC elects to make alternative
-----------------------------
arrangements for disposition of Exxon Equity Propane pursuant to Section 5.2,
Exxon, or Exxon's designee, shall deliver the Exxon Equity Propane at the
applicable Alternate Delivery Point(s). Title to and risk of all loss of or
11
<PAGE>
damage to the Exxon Equity Propane shall pass to POC at the applicable Meter, at
which time POC shall be deemed to be in possession and control of such Exxon
Equity Propane. Deliveries of Exxon Equity Propane shall be made at a
reasonably constant rate and at a pressure sufficient to enter the applicable
pipeline against the working pressure in the pipeline, as such pressure may vary
from time to time; provided, however, Exxon shall not be obligated to deliver
Exxon Equity Propane at a pressure in excess of one thousand one hundred (1100)
Psig.
5.4 Specifications The specifications of the Exxon Equity Propane,
--------------
Exxon Equity Butane and the Exxon Equity Product delivered and received shall
conform with the specifications set forth in Exhibit "A", as the same may be
amended from time to time by mutual agreement of the Parties or by change in Mix
specifications implemented by any applicable regulatory agency in Mexico.
Provided, however, with POC's prior written consent, Exxon Equity Butane may
exceed _________ (____%) (liquid volume) of the propane component of the Exxon
Equity Mix delivered.
5.5 Measurement and Sampling Measurement, testing, sampling, and
--------------------------
analysis of the Exxon Equity Propane and Exxon Equity Butane delivered to POC
shall be performed in accordance with Exhibit "B".
5.6 Exxon Warranty Exxon warrants that at the time of delivery, the
---------------
Exxon Equity Propane and Exxon Equity Butane included in the Mix will conform to
the specifications set forth in Exhibit "A" (as amended or varied pursuant to
Section 5.4). Exxon expressly disclaims any warranty as to whether the POC
Propane included in the Mix conforms to the specifications set forth in the EPC
Tariff or in Exhibit "A" (as amended or varied pursuant to Section 5.4). EXXON
MAKES NO OTHER WARRANTIES UNDER THIS AGREEMENT AND EXPRESSLY DISCLAIMS ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO
THE MIX DELIVERED UNDER THIS AGREEMENT.
ARTICLE 6
Fees and Compensation; Deficiency Fees
--------------------------------------
6.1 Compensation As full consideration for Exxon's pumping,
------------
blending and delivery services and the sale and delivery of Mix to POC pursuant
to this Agreement, POC shall pay to Exxon in accordance with the provisions of
this Agreement, the following: (a) the Product Fee; (b) the Pipeline Delivery
Fee; (c) the Pumping and Blending Fee; (d) the Pumping and Blending Deficiency
Fee, if applicable; (e) the Delivery Deficiency Fee, if applicable; and (f) the
Purchase Deficiency Fee, if applicable.
6.2 Product Fee For the Exxon Equity Product delivered to POC pursuant
------------
to this Agreement, POC shall pay to Exxon a Product Fee in an amount equal to
the sum of the following: (a) the product of the total volume of Exxon Equity
Propane (expressed in Gallons) delivered each Delivery Week (as measured at
Plant Propane Meter #1 or at Ella-Seadrift Propane Meter #5 or Dean Propane
Meter #6, or both, as applicable, if POC elects Alternate Delivery Point(s)) and
12
<PAGE>
the Propane Index Price, adjusted for discounts or premiums, as appropriate, and
(b) the product of the total volume of Exxon Equity Butane (expressed in
Gallons) delivered each Delivery Week (as measured at Plant Butane Meter #4) and
the Butane Index Price, adjusted for discounts or premiums, as appropriate.
Expressed as a formula: Product Fee = (Exxon Equity Propane x adjusted Propane
Index Price) + (Exxon Equity Butane x adjusted Butane Index Price).
(a) Product Price Discount Price discounts shall be applied to the
-----------------------
Propane Index Price and the Butane Index Price on Exxon Equity Propane and Exxon
Equity Butane delivered to POC at the Delivery Point (and Exxon Equity Propane
delivered to the Alternate Delivery Point(s)) as follows: (i) During the period
commencing on the Effective Date and ending September 30, 2000, a discount of
_______ ($ _____) per Gallon shall apply, (ii) after September 30, 2000 and for
the remainder of the Term, ______discount shall apply.
(b) Product Price Premium POC has complete discretion with respect
----------------------
to the identity of its customers and the prices and terms under which it sells
Mix to Pemex or its LPG resellers. Provided, however, when the Mt. Belvieu
Price Differential equals or exceeds _________ ($_____) per Gallon, a price
premium shall be added to the Propane Index Price and the Butane Index Price for
Exxon Equity Propane and Exxon Equity Butane delivered to POC at the Delivery
Point (and to Exxon Equity Propane delivered to the Alternate Delivery
Point(s)). The amount of such price premium shall be the lesser of (i)
_________ ($_____) per Gallon, or (ii) the amount of the positive difference
between the Mt. Belvieu Price Differential and ____________ ($______) per
Gallon. The Product Price premium for each Calendar Year will be determined in
January of such Calendar Year and added to the weekly Product Fee for the
Calendar Year, commencing on the first day of January in which such premium is
determined.
(c) Calculation Adjustments For purposes of determining the volume
------------------------
of Exxon Equity Propane for calculating compensation, a volume of ethane not to
exceed two percent (2%) (liquid volume) of the propane shall be treated as
propane. For purposes of determining the volume of Exxon Equity Butane for
calculating compensation, heavier hydrocarbon components in the Exxon Equity
Butane shall be treated as normal butane. Any of the following components
included in either Exxon Equity Butane or Exxon Equity Propane shall be excluded
from the volumes for calculating compensation: (i) ethane in excess of two
percent (2%) (liquid volume) of the propane; (ii) carbon dioxide in excess of
one half percent (0.5%) of the ethane; (iii) methane; and (iv) other inert
contents.
(d) Provisional Pricing As provided in Section 7.1, Exxon shall
--------------------
invoice POC for Exxon Equity Product deliveries on a weekly basis. For purposes
of weekly invoicing, a provisional Butane Index Price and Propane Index Price
shall be developed for each Delivery Month by using the OPIS low non-TET price
for propane and normal butane on the first Business Day of each Delivery Month.
At the end of each Delivery Month, the actual pricing calculation provided in
the definitions of "Butane Index Price" and "Propane Index Price" shall be used
to adjust the Exxon Equity Product pricing for the Delivery Month, as
appropriate, and the adjustment will be reflected in the next weekly invoice.
(e) OPIS Changes If the reference prices set forth in the
-------------
definitions of "Butane Index Price" and "Propane Index Price" for any reason
cease to be published by OPIS or if OPIS is discontinued, then the successor
reference prices or publication accepted by industry shall be used. In the
13
<PAGE>
absence of a successor, POC and Exxon shall develop a mutually agreeable pricing
mechanism for propane and butane that enables calculation of an index price that
is closely comparable to that price index previously used. If the Parties are
unable, after the use of reasonable efforts, to agree upon the pricing
mechanism, then the matter shall be submitted to binding arbitration pursuant to
Article 19.
6.3 Product Price Redetermination If, on or after January 1, 2005, the
-------------------------------
Mt. Belvieu Price Differential is greater than or less than ____________
($_____) per Gallon by more than ________ ($______) per Gallon, then either
Party may request a redetermination of the Product Price by delivering written
notice to the other Party at any time after January 1, 2005 but prior to July 1,
2005. Promptly after giving such notice, the Parties shall commence
negotiations in good faith towards agreement on a new Product Price. The term
"good faith" shall mean the honest statement of facts along with each Party's
bargaining position at that time, but in no event shall either Party be required
to act in the best interest of the other Party. The redetermined Product Price
shall become effective as of January 1, 2005 and shall continue in effect for
the balance of the Term. If the Parties are unable to reach agreement within
ninety (90) Days of the date of the requesting Party's notice requesting
redetermination, then the new Product Price will be submitted to binding
arbitration pursuant to Article 19. The maximum increase or decrease in the
Product Price resulting from the price redetermination shall be ______ ($____
per Gallon.
6.4 Delivery of Information POC shall provide to Exxon in writing, on or
-----------------------
before the fifteenth (15th) of January of each Calendar Year, documentation
evidencing the average of all Matamoros-into-truck or tank-car wholesale prices
included in term contracts in effect as of January 1 of such year, on which
contracts the Matamoros Average Mix Price will be calculated. Exxon shall have
the right pursuant to Section 7.2 to audit all books and records of POC (or its
Affiliate, Penn Octane Mexico) relating to reseller Mix sales in order to verify
the Mt. Belvieu Price Differential.
6.5 Pipeline Delivery Fee For the transportation services arranged for
-----------------------
or provided to POC by Exxon pursuant to this Agreement, POC shall pay to Exxon,
on a weekly basis, a Pipeline Delivery Fee in an amount equal to the product of
(a) the volume recorded on CCPL Propane Meter #2 each Delivery Week and (b) the
amount of the cents per Barrel charge included in the EPC Tariff in effect at
the applicable time. If at any time during the Term the amount of the EPC
Tariff is revised, then the cents per Barrel charge on which the Pipeline
Delivery Fee is calculated will be increased or decreased accordingly. If the
amount of the EPC Tariff exceeds _________ ($_____) per Barrel, then POC shall
have the right to terminate the provisions of Article 4 of this Agreement upon
giving Exxon written notice of termination, in which event POC's corresponding
obligations to pay the Pipeline Delivery Fee under Section 6.5, the Pumping and
Blending Fee under Section 6.6, the Pumping and Blending Deficiency Fee under
Section 6.7, and the Delivery Deficiency Fee under Section 6.8 shall also be
terminated. The remainder of the Agreement shall continue in full force and
effect. Provided, however, if Exxon agrees to absorb any amount of the EPC
Tariff in excess of ___________ ($_____) per Barrel, then POC shall not have the
right to terminate pursuant to this Section 6.5.
6.6 Pumping and Blending Fee For the pumping and blending services
---------------------------
provided pursuant to this Agreement, POC shall pay to Exxon, on a weekly basis,
a Pumping and Blending Fee in an amount equal to the product of _______________
($ ______) per Barrel and one hundred ten percent (110%) of the volume recorded
14
<PAGE>
on CCPL Propane Meter #2 and Ella-Seadrift Propane Meter #3. Expressed as a
formula: Pumping and Blending Fee = $______ X ((CCPL Propane Meter #2 volume +
Ella-Seadrift Propane Meter #3 volume) x 1.1). The ______ per Barrel charge on
which the Pumping and Blending Fee is calculated may, by written notice, be
adjusted either upward or downward annually after Calendar Year 2000 by an
amount no greater than the amount by which the Gross Domestic Product Implicit
Price Deflator, as published by the Department of Commerce, Bureau of Economic
Analysis for the prior Calendar Year exceeds the Gross Domestic Product Implicit
Price Deflator for 2000.
6.7 Pumping and Blending Deficiency Fee Pursuant to Section 4.2, POC is
------------------------------------
obligated to deliver to Exxon for pumping and blending the Pumping and Blending
Minimum Volume. If POC fails to deliver to Exxon the Pumping and Blending
Minimum Volume of POC Propane for any period designated in Section 4.2, POC
shall pay to Exxon in a lump sum at the end of the Calendar Year in which the
designated period ends, a deficiency fee (the "PUMPING AND BLENDING DEFICIENCY
FEE") calculated as follows: the deficit volume shall be determined by
calculating the positive difference between (a) the Pumping and Blending Minimum
Volume for the designated period, and (b) the sum of the volume of POC Propane
recorded on CCPL Propane Meter #2 and Ella-Seadrift Propane Meter #3 (expressed
in Barrels) during the applicable period (plus any applicable volume credits
pursuant to Section 4.6(b)), which deficit volume amount shall be multiplied by
a factor of 1.1. Such product shall then be multiplied by the cents per Barrel
charge used in calculating the Pumping and Blending Fee in effect at the
applicable time. If at any time during an applicable period, Exxon determines,
in Exxon's sole opinion based on actual monthly delivery volumes, that POC will
be unable to meet its Pumping and Blending Minimum Volume and, as a result, will
exceed Exxon's approved credit limits, then Exxon shall have the right to
require POC to make weekly deficiency payments to stay within Exxon's approved
credit limits. At the end of each Calendar Year, an adjustment will be made to
reflect the actual Pumping and Blending Deficiency Fee, as appropriate.
6.8 Delivery Deficiency Fee Pursuant to Section 4.5, POC is obligated to
-----------------------
deliver for transport on the CCPL the Minimum Delivery Volume. If POC fails to
deliver for transport on the CCPL its Minimum Delivery Volume of POC Propane for
any period designated in Section 4.5, POC shall pay to Exxon in a lump sum at
the end of the Calendar Year in which the designated period ends, a deficiency
fee (the "DELIVERY DEFICIENCY FEE") calculated as follows: the deficit volume
shall be determined by calculating positive difference between (a) the Minimum
Delivery Volume for the designated period and (b) the volume recorded on CCPL
Propane Meter #2 (expressed in Barrels) during the applicable period (plus any
applicable volume credits pursuant to Section 4.6(a)); such amount shall be
multiplied by the cents per Barrel charge used in calculating the Pipeline
Delivery Fee. If at any time during an applicable period, Exxon determines, in
Exxon's sole opinion based on actual monthly delivery volumes, that POC will be
unable to meet its Minimum Delivery Volume and, as a result, will exceed Exxon's
approved credit limits, then Exxon shall have the right to require POC to make
weekly deficiency payments to stay within Exxon's approved credit limits. At
the end of each Calendar Year, an adjustment will be made to reflect the actual
Delivery Deficiency Fee, as appropriate.
6.9 Purchase Deficiency Fee
-------------------------
(a) Calculation Pursuant to Section 5.2, POC is obligated to
-----------
purchase and receive, or pay for, if available for delivery to POC at the
Delivery Point or the Alternate Delivery Point(s), as applicable, but not taken,
the Minimum Purchase Volume. If for any reason POC fails to purchase and
receive, if available for delivery to POC, the Minimum Purchase Volume required
for each Delivery Month, then, POC shall pay to Exxon at the end of each
Delivery Month a deficiency fee (the "PURCHASE DEFICIENCY FEE") calculated as
15
<PAGE>
follows: the deficit volume shall be determined by calculating the positive
difference between (a) the Minimum Purchase Volume for the Delivery Month, and
(b) the sum of the volume of Exxon Equity Product (expressed in Barrels)
actually received by POC at the Delivery Point (as measured at Plant Propane
Meter #1 and Plant Butane Meter #4) and the volume of Exxon Equity Propane
(expressed in Barrels) actually received by POC at the Alternate Delivery
Point(s) (as measured at Ella-Seadrift Propane Meter #5 and Dean Propane Meter
#6) during the Delivery Month. Such deficit volume amount shall be multiplied
by the Product Price (including any applicable discount or premium).
(b) Alternate Disposition Costs Notwithstanding the preceding
-----------------------------
calculation, if Exxon sells or otherwise disposes of the Exxon Equity Propane
--
and Exxon Equity Butane which would have been included as part of the deficit
volume, then the Purchase Deficiency Fee shall be calculated as follows: the
deficit volume shall be determined as set forth in Section 6.9(a); such deficit
volume shall be multiplied by an amount equal to the positive difference, if
any, between the Product Price and the actual amount received by Exxon for the
sale of the Exxon Equity Propane and Exxon Equity Butane. In addition, POC
shall reimburse Exxon all costs of such disposition, including without
limitation, the cost of transporting the Exxon Equity Propane and Butane to an
equivalent market. Exxon will use good faith efforts to minimize such alternate
disposition costs.
Example:
During a given Delivery Month, Exxon produces _________________ Barrels (_____b)
of Exxon Equity Product, but POC receives only _______________ Barrels (____b).
As a result of POC's failure to accept delivery of the Exxon Equity Product,
Exxon transports ________________Barrels (____b) of Exxon Equity Propane and
Exxon Equity Butane to Corpus Christi at a cost of ______ ($____) per Gallon and
sells the Exxon Equity Propane and Exxon Equity Butane at _____ ($____) per
Gallon below the Product Price. POC would be required to pay Exxon a Purchase
Deficiency Fee in the amount of _________________ ($_________), calculated as
follows: (_______ Barrels x 42 (to convert to Gallons) x $____ (sum of
disposition cost and price difference) = $_________
ARTICLE 7
Billing, Payment and Audit
--------------------------
7.1 Billing and Payment Exxon shall render to POC the invoices set forth
-------------------
in this Section 7.1. The supporting data and calculations, including all
relevant analysis, computations, tickets and measurement data used by Exxon in
computing the amounts set forth in the invoices shall be submitted with each
invoice.
(a) Weekly Invoices At the end of each Delivery Week during the
----------------
Term, Exxon shall render to POC an invoice covering (i) the provisional Product
Price for Exxon Equity Propane and Exxon Equity Butane delivered during the
Delivery Week; (ii) the Pumping and Blending Fee for the Delivery Week, (iii)
the Pipeline Delivery Fee for the Delivery Week; (iii) the Pumping and Blending
16
<PAGE>
Deficiency Fee, if Exxon has elected to invoice weekly pursuant to Section 6.7;
and (iv) the Delivery Deficiency Fee, if Exxon has elected to invoice weekly
pursuant to Section 6.8.
(b) Monthly Invoices At the beginning of each Delivery Month, Exxon
-----------------
shall render to POC an invoice covering (i) any applicable adjustments to the
Product Price for the preceding Delivery Month calculated in accordance with
Section 6.2(d); (ii) any applicable Purchase Deficiency Fee, (iii) any remaining
charges for the Pumping and Blending Deficiency Fee; and (iv) any remaining
charges for the Delivery Deficiency Fee.
(c) Annual Invoices If Exxon has not elected to invoice the Pumping
---------------
and Blending Deficiency Fee or the Delivery Deficiency Fee on a weekly basis, or
if an adjustment of either such fee is appropriate, Exxon shall render to POC at
the end of each Calendar Year an invoice covering the Pumping and Blending
Deficiency Fee, or the Delivery Deficiency Fee, or the adjustments, as
appropriate.
If payment is made pursuant to a documentary letter of credit, invoices shall be
sent to the issuing bank in accordance with the terms of such letter of credit.
Otherwise, invoices and supporting data shall be sent to the following address:
PENN OCTANE CORPORATION
12118 South Bloomfield
Santa Fe Springs, CA 90670
If payment is made pursuant to a documentary letter of credit, Exxon shall make
draws in accordance with the terms of such letter of credit. Otherwise, POC
shall pay each invoice in full within twelve (12) Days from receipt of such
invoice and supporting data POC by wire transfer to Exxon at:
Citibank, N.A., New York, NY
ABA 0210-0008-9
For credit to Exxon Co. U.S.A.
Account No. 00034219
If the payment due date falls on a Sunday or Monday banking holiday, payment
will be due on the next succeeding Business Day. If 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.
7.2 Audit Each Party and its duly authorized representatives shall have
-----
the right to witness custody transfer measurement procedures in accordance with
Exhibit "B". In addition, each Party and its duly authorized representatives
shall have access to the accounting and measurement records and any other
documents maintained by the other Party or any of its Affiliates, subcontractors
or agents which are necessary to verify the accuracy of any billing or
transaction under this Agreement. Each Party shall have the right to audit, at
its own expense, such records at any reasonable time or times within twenty-four
(24) months after the end of each Calendar Year during which the transaction in
question occurred. Each Party shall preserve and shall cause all Affiliates,
subcontractors and agents to preserve all of the above referenced records and
17
<PAGE>
documents for the same period specified above. 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. For purposes of auditing the margins associated with the Mt.
Belvieu Price Differential in Section 6.4, POC shall cause its Affiliate, Penn
Octane Mexico, to comply with the terms of this Section 7.2.
ARTICLE 8
Representations and Warranties
------------------------------
As a material inducement to entering into this Agreement, POC, with respect to
itself and its Affiliates, as applicable, hereby represents and warrants to
Exxon as of the Effective Date as follows:
(a) it is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation and is qualified to
conduct its business in those jurisdictions necessary to perform
this Agreement;
(b) it (or its Affiliate, Penn Octane Mexico) has all regulatory
authorizations, permits and licenses necessary for it to legally
perform its obligations under this Agreement;
(c) the execution, delivery and performance of this Agreement are
within its powers, have been duly authorized by all necessary
action and do not violate any of the terms or conditions in
its governing documents or any contract to which it is a party
or any law, rule, regulation, order, writ, judgment, decree or
other legal or regulatory determination applicable to it;
(d) there are no bankruptcy, insolvency, reorganization, receivership
or other arrangement proceedings pending or being contemplated by
it, or to its knowledge threatened against it;
(e) there are no suits, proceedings, judgments, rulings or orders by or
before any court or any governmental authority that materially
adversely affect its ability to perform this Agreement; and
(f) it (or its Affiliate, Penn Octane Mexico) has obtained written
purchase commitments to purchase the Minimum Purchase Volume
required to be purchased by POC under Section 5.2 either (i) from
Pemex for a minimum of twelve (12) months from the Effective Date,
or (ii) from an LPG reseller or a group of LPG resellers in
Northeast Mexico for a minimum of five (5) years from the
Effective Date.
18
<PAGE>
ARTICLE 9
Credit and Financial Responsibility
-----------------------------------
9.1 Credit Provisions POC shall provide to Exxon a letter of credit in
------------------
accordance with the requirements set forth in Exhibit "D" to cover all of POC's
payment obligations set forth in Article 6 of this Agreement.
9.2 Financial Responsibility If, during the Term, the financial
-------------------------
responsibility of POC becomes impaired or unsatisfactory to Exxon, advance cash
payment or satisfactory security reasonably acceptable to Exxon shall be given
upon demand; and performance under this Agreement may be withheld until such
payment or security is received. If this Agreement is assigned during the Term,
the assignor will be required to provide sufficient financial information for
determination of financial responsibility of the assignee.
9.3 Setoff For the purpose of this Section 9.3 only, the terms "Exxon"
------
and "POC" shall each include their respective subsidiaries and Affiliates.
Exxon may setoff any amount owed to Exxon by POC against any amount owed to POC
by Exxon, whether under this Agreement or any other agreement or arrangement
between or among any of them. If any amount owed is unliquidated or
unascertainable, Exxon may setoff an amount estimated by it in good faith to be
the amount owed.
ARTICLE 10
Taxes
-----
Exxon shall pay and/or be responsible for all taxes levied or assessed upon the
production, severance and processing of the gas from which the Exxon Equity
Product delivered to POC is extracted and upon the transportation or storage of
the Exxon Equity Product and any other taxes payable on or with respect to the
Exxon Equity Product prior to its delivery to POC. POC shall pay and/or be
responsible for payment of all taxes that may be levied or assessed upon the
purchase, transportation, storage or use of the POC Propane or the Mix and any
other taxes payable on or with respect to the Mix after POC takes delivery at
the Delivery Point or the Alternate Delivery Point(s).
ARTICLE 11
Default and Remedies
--------------------
11.1 Event of Default An "Event of Default" means, with respect to a
------------------
Party alleged to have taken or failed to have taken any of the actions set forth
below in this Section 11.1 (the "DEFAULTING PARTY"):
(a) the failure by POC to make, when due, any payment required under
this Agreement if such failure is not remedied within fifteen
(15) Business Days after written notice from Exxon; or
19
<PAGE>
(b) any representation or warranty made by the Defaulting Party in
this Agreement proves to have been false or misleading in any
material respect when made or ceases to remain true during the
Term; or
(c) the failure by the Defaulting Party to perform any covenant set
forth in this Agreement, and such failure is not excused by force
majeure or cured within fifteen (15) Business Days after written
notice thereof to the Defaulting Party; or
(d) the Defaulting Party:
(i) makes an assignment or any general arrangement for the
benefit of creditors (other than a collateral assignment
of this Agreement by POC as security);
(ii) files a petition or otherwise commences, authorizes or
acquiesces in the commencement of a proceeding or cause
of action under any bankruptcy or similar law for the
protection of creditors, or has such petition filed against
it and such petition is not withdrawn or dismissed for
thirty (30) days after such filing;
(iii) otherwise becomes bankrupt or insolvent (however evidenced);
or
(iv) is unable to pay its debts as they fall due; or
(e) the failure of POC to maintain the letter of credit required
pursuant to Section 9.1.
11.2 Remedies Upon an Event of Default If an Event of Default
--------------------------------------
occurs under this Agreement with respect to a Defaulting Party, the other Party
("NON-DEFAULTING PARTY") may terminate this Agreement by giving the Defaulting
Party written notice of termination. Upon the occurrence of any Event of
Default listed in Section 11.1(d) as it may apply to any Party, this Agreement
shall automatically terminate, without notice, and without any other action by
either Party. In addition to the Non-Defaulting Party's right to terminate, the
Non-Defaulting Party may exercise any remedy available at law or in equity, or
both, against the Defaulting Party, subject, however, to the limitations set
forth in Section 14.2. The Parties acknowledge that it is their intent that
payment of the Delivery Deficiency Fee, the Purchase Deficiency Fee, or the
Pumping and Blending Deficiency Fee is not intended to be the exclusive remedy
of Exxon for failure of POC to perform its POC Propane delivery obligations
under Article 4 nor its Exxon Equity Product purchase obligations under Article
5.
11.3. Payment Upon Termination Upon termination of this Agreement
--------------------------
pursuant to Section 11.2, each Party shall pay the other Party all amounts due
under this Agreement, as applicable, up to the date of termination.
11.4 Attorney's Fees If either Party engages in legal proceedings for
----------------
the purposes of enforcing this Agreement or recovering damages due to the breach
of this Agreement by the other Party, the enforcing Party shall be entitled to
reimbursement by the other Party for costs, reasonable attorneys' fees and any
other reasonable expenses incurred in connection with those legal proceedings.
20
<PAGE>
ARTICLE 12
Force Majeure;
--------------
Repair and Maintenance
----------------------
12.1 Force Majeure
--------------
(a) Effect of Force Majeure If either Party is rendered unable, by
------------------------
reason of a force majeure event, to carry out, in whole or in part, its
obligations under this Agreement, the Party claiming inability shall give notice
to the other Party as soon as reasonably practical after the occurrence of that
event. Such notice shall be confirmed promptly in writing giving full
particulars, and effective upon the occurrence of the force majeure event, the
obligations of such Party (other than any obligation to make a payment then due
or becoming due under this Agreement with respect to performance prior to such
event) shall, insofar as they are affected by the force majeure event, be
suspended during the continuance of any inability so caused, but for no longer
period; and such cause shall, as far as possible, be remedied with all
reasonable diligence. Notice of termination of force majeure conditions shall
be given in writing to the other Party.
(b) Definition As used in this Agreement, the term "force majeure"
----------
shall mean an event which is beyond the reasonable control of the Party claiming
an event of force majeure which reasonably could not have been prevented by the
exercise of due diligence, including, without limitation: acts of God, acts of
the public enemy; wars; blockades; insurrections; strikes, lockouts, or
industrial disputes or disturbances; riots; disorders; epidemics; landslides;
lightning; earthquakes; hurricanes or threats of hurricanes; fires; storms,
floods, or washouts; arrests and restraints; civil disturbances; explosions,
breakage or accident to machinery or lines of pipe located within the United
States; freezing of wells or lines of pipe located within the United States;
acts of governmental authority; embargoes; failure of pipelines or other
carriers located within the United States to transport or furnish facilities for
transportation; changes of rules and regulations with regard to transportation
by common or jurisdictional carriers within the United States; failures,
disruptions, or breakdowns of machinery or of facilities of production,
manufacture, transportation, distribution and consumption located within the
United States; the necessity for making repairs, maintenance, alterations,
enlargements or connections to the Plant or any machinery, facilities or lines
of pipe located within the United States. It is understood and agreed that the
settlement of strikes or lockouts shall be entirely within the discretion of the
Party having the difficulty and that the above requirement that any force
majeure shall be remedied with all reasonable diligence shall not require the
settlement of strikes or lockouts by acceding to the demands of the opposing
Party when such course is not advisable in the discretion of the Party having
the difficulty. The term "force majeure" does not include (i) economic events,
such as lack of funds or changes in market conditions or prices, nor (ii) any
event which affects machinery, facilities or lines of pipe which are located
outside of the United States.
12.2 Repair and Maintenance If the need to affect major repairs,
------------------------
maintenance, or alteration work arising from the normal operation of the Plant
or any other facility utilized in connection with performing either Party's
obligations under this Agreement, whether or not as a result of force majeure,
makes it necessary for either Party (or the designated operator of any such
facility, as applicable) to shut down or seriously impede the operation of such
facility on a temporary basis, such Party shall, when reasonably possible, so
21
<PAGE>
notify the other Party as soon as reasonably practicable, so that the other
Party shall have the opportunity to minimize disruption to its operations. With
respect to repairs, maintenance or alteration work to the Plant or any other
facility located within the United States, the obligations of the Parties (other
than any obligation to make a payment then due or becoming due under this
Agreement with respect to performance prior to such event) shall, to the extent
they are affected by the repairs, maintenance or alteration work, be suspended
during the continuance of such repairs, maintenance or alteration work.
ARTICLE 13
Assignment
----------
This Agreement shall be binding on and inure to the benefit of the successors
and assigns of the Parties; provided, however, that neither Party shall assign
this Agreement in whole or in part without the prior written consent of the
other Party, which consent shall not be unreasonably withheld. Either Party
shall have the right to assign this Agreement to an Affiliate without the
consent of the other Party. Any such assignment shall not relieve the assignor
from any past or future obligations under this Agreement. Nothing in this
Agreement shall in any way limit the right of Exxon to change or replace the
operator of the Plant or to sell its interest in the Plant; provided, however,
any such sale shall be expressly subject to this Agreement.
ARTICLE 14
Indemnity; Limitation of Liability
----------------------------------
14.1 Indemnity As between the Parties, Exxon shall be deemed to be in
---------
control and possession of the Mix deliverable hereunder and responsible for any
damages or injuries caused thereby until the Mix is delivered to POC at the
Delivery Point (or the Exxon Equity Propane is delivered at the Alternate
Delivery Point(s), as applicable); and POC shall be deemed to be in control and
possession of the Mix delivered hereunder and responsible for any damages or
injuries caused thereby from and after the Mix is delivered to POC at the
Delivery Point (or the Exxon Equity Propane is delivered at the Alternate
Delivery Point(s), as applicable). POC shall indemnify, defend and hold Exxon
harmless from and against all claims, suits, liability and expense on account of
injury to or death of persons, harm to the environment, or damage to property
caused by or resulting from negligence or acts of willful misconduct on the part
of POC, its employees, agents or contractors in the performance of this
Agreement except to the extent that such injury, death, harm or damage is caused
by negligence or acts of willful misconduct on the part of Exxon, its employees,
agents or contractors. Exxon shall indemnify and hold POC harmless from and
against all claims, suits, liability and expense on the account of injury to or
death of persons, harm to the environment, or damage to property caused by or
resulting from negligence or acts of willful misconduct on the part of Exxon,
its employees, agents or contractors in the performance of this Agreement except
to the extent that such injury, death, harm or damage is caused by negligence or
acts of willful misconduct on the part POC, its employees, agents or
contractors. Where personal injury, death, harm to the environment, or loss or
damage to property is the result of the joint acts or omissions of the Parties,
the Parties expressly agree to indemnify each other in proportion to their
respective share of such joint acts or omissions.
22
<PAGE>
14.2 Limitation of Liability NOTWITHSTANDING ANYTHING TO THE
-------------------------
CONTRARY ELSEWHERE IN THIS AGREEMENT, EXCEPT AS EXPRESSLY SET FORTH IN SECTIONS
6.7, 6.8, AND 6.9, NEITHER PARTY SHALL BE LIABLE OR OTHERWISE RESPONSIBLE TO THE
OTHER PARTY FOR ANY EXEMPLARY, INDIRECT, CONSEQUENTIAL, PUNITIVE, OR SPECIAL
DAMAGES OR LOST PROFITS WHICH IN ANY WAY ARISE OUT OF OR RELATE TO THIS
AGREEMENT OR THE PERFORMANCE OR BREACH THEREOF.
ARTICLE 15
Confidentiality
---------------
Each Party agrees not to disclose the terms of this Agreement to a third party
(other than the Party's or its Affiliates' employees, lenders, counselors or
accountants who have agreed to keep such terms confidential) except in order to
comply with any applicable law, order, regulation or exchange rule; provided,
each Party shall notify the other Party of any proceeding of which it is aware
which may result in disclosure. The Parties shall be entitled to all remedies
available at law or in equity to enforce, or seek relief in connection with,
this confidentiality obligation. This Article 15 shall survive the termination
of this Agreement for a period of two (2) years.
ARTICLE 16
Use Of Trademark; Publicity Releases
------------------------------------
POC shall not, without the prior written consent of Exxon, (a) use the name or
any trade name or registered trademark of Exxon Corporation or any of its
divisions or Affiliates in any advertising or communications to the public in
any format; or (b) make publicity releases or announcements regarding this
Agreement, or any activities related to this Agreement. As to publicity releases
or
announcements, Exxon's consent shall not be unreasonably withheld. POC has
advised Exxon that regulatory requirements for financial disclosure from the SEC
or other regulatory agencies may exist, and Exxon agrees to take into account
such requirements in determining its consent in a timely fashion.
ARTICLE 17
Notices
-------
17.1 Notices Notices required or permitted to be given under this
-------
Agreement shall be in writing and deemed to be properly given if (a) delivered
in person, (b) deposited in the United States mail, certified or registered,
return receipt requested with postage prepaid, or (c) delivered by private,
prepaid courier with record of receipt and addressed to the appropriate Party at
the addresses set forth below:
EXXON POC
----- ---
Exxon Company, U.S.A. Penn Octane Corporation
P. O. Box 2180 900 Veterans Blvd., Suite 240
Houston, Texas 77252 Redwood City, CA 94063
Attn: NGL Business Attn: Jerry Richter
Development Coordinator
Phone: 713-656-4064 Phone: 650-368-1501
Fax: 713-656-6210 Fax: 650-368-1505
23
<PAGE>
17.2. Receipt of Notices Notice delivered in person shall be effective
--------------------
upon receipt. Notice by certified or registered mail or courier shall be deemed
to have been received upon signature of the receiving Party. A Party may change
its address by providing notice of same in accordance with this Article 17.
ARTICLE 18
Business Standards; Accuracy Of
-------------------------------
Records; and Legal Compliance
-----------------------------
18.1 Compliance With Laws and Regulations Each Party shall be
----------------------------------------
responsible and liable for and agrees to indemnify and hold harmless the other
-
Party 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 with all applicable
federal, state, and local laws, ordinances, orders, rules and regulations.
18.2 Exporter of Record POC, or its Affiliate Penn Octane Mexico, shall
-------------------
be the exporter of record for pipeline or other deliveries into Mexico of Mix
purchased under this Agreement and agrees to fulfill all requirements applicable
to the exporter of record, including but not limited to those of the United
States or Mexico customs and shall pay any applicable export duty or any other
applicable fees and fines, penalties or costs.
18.3 Business Practices Each Party agrees (a) 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
amendments to it; (b) that all financial settlements, billings 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; and (c) 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 no longer accurate and complete.
18.4 Business Standards Each Party, in performing its obligations under
-------------------
this Agreement shall establish and maintain appropriate business standards,
procedures, and controls including those necessary to avoid any real or apparent
impropriety or adverse impact on the interests of the other Party or its
Affiliates. Each Party shall exercise all reasonable care and diligence to
prevent any actions or conditions which could result in a conflict with the
other Party's best interests. This obligation shall apply to the activities of
employees, agents and subcontractors of such Party and its Affiliates in
relations with the employees of the other Party and their families, or third
parties arising from this Agreement. Such efforts include, but are not limited
to, establishing precautions to prevent either party or its subcontractors from
making, receiving, providing, or offering any substantial gifts, extravagant
entertainment, payments, loans or other considerations.
24
<PAGE>
ARTICLE 19
Arbitration
-----------
If arbitration is invoked to determine the pricing mechanism to be used in
calculating an index price under Section 6.2(e) or to determine the Product
Price redetermination under Section 6.3, the arbitration will be conducted as
follows. Prior to submission of the matter to arbitration, each Party shall
submit in writing to the other Party its final offer as to the issue in dispute:
(a) The question in dispute will be determined through binding
arbitration before one (1) arbitrator pursuant to the Commercial Arbitration
Rules of the American Arbitration Association ("AAA") as modified by this
Agreement. The arbitration shall take place in Houston, Texas and shall follow
the expedited procedures set forth in the rules provided that such procedures
shall be completed within ninety (90) days from the date arbitration is invoked.
(b) A single arbitrator shall be appointed by mutual consent of both
Parties. If the Parties, however, cannot reach agreement on an arbitrator
within fifteen (15) days of submission of notice of arbitration, then the
Parties shall request AAA to select the arbitrator by administrative
appointment. The arbitrator shall be an individual who is not and never has
been an officer, director, or employee of either Party nor an employee of either
Party's competitors in the gas industry, and who is qualified by education,
knowledge, training, and experience to decide upon the particular question in
dispute. Consultants, contractors and expert witnesses previously used by
either Party shall not be used as an arbitrator without the consent of both
Parties.
(c) The Federal Arbitration Act shall apply to the arbitration and the
arbitrator shall apply the substantive law of the State of Texas to the merits
of the case. The arbitrator shall not resort to any conflict of law rule that
would call for the application of the law of another jurisdiction,
(d) Each Party may submit evidentiary documents to the arbitrator in support
of its position. The arbitrator may request, but neither Party shall be
compelled to provide, any further evidentiary documents or information from the
Parties. However, the arbitrator may ask questions of the Party submitting
documents as they relate to the matter in dispute.
(e) Each Party shall bear one half of the fees and expenses associated
with the arbitration. The arbitrator's decision is limited to selecting one or
the other of the final written offers submitted by the Parties. No other
pricing mechanism or redetermined price, as applicable, may or will be adopted
by the arbitrator. However, the Parties may mutually agree to a pricing
mechanism or redetermined price, as applicable, at any time prior to the
conclusion of the arbitration. Once the arbitration award is made, however, the
decision of the arbitrator made in writing shall be final and binding on both
the Parties, and the Parties will abide by and comply with such decision. The
decision shall be enforceable in a court of competent jurisdiction which shall,
if necessary, enter judgment on such award or decision. Neither Party may
contest, attack or appeal the arbitration award or decision to any court or
administrative agency.
25
<PAGE>
ARTICLE 20
Miscellaneous
-------------
20.1 Conflict In the event of a conflict between the terms and
--------
provisions of this Agreement and any exhibit attached hereto, the terms and
provisions of the Agreement shall control. In the event of a conflict between
the language of a provision and either an example or a formulaic description,
the language of the provision shall control.
20.2 Entirety This Agreement and the Exhibits attached hereto constitute
--------
the entire agreement between the Parties. There are no prior or contemporaneous
agreements or representations affecting the same subject matter other than those
herein expressed. No amendment, modification or change herein shall be
enforceable unless reduced to writing and executed by both Parties.
20.3 Law Governing Agreement This Agreement and the rights and duties of
-----------------------
the Parties shall be governed by and construed, enforced and performed in
accordance with the laws of the State of Texas, without giving effect to
principles of conflicts of laws or choice of law rules. Notwithstanding anything
to the contrary, this Agreement shall not be interpreted or applied so as to
require either party to do or refrain from doing, anything which would
constitute a violation of any laws or regulations.
20.4 Non-Waiver No waiver by either Party of any one or more breaches or
----------
defaults by the other Party in the performance of any of the covenants or
conditions of this Agreement shall be construed as a waiver of any succeeding
default or defaults whether of a like kind or different nature.
20.5 Severability In case any one or more of the provisions contained in
------------
this Agreement shall for any reason be held invalid, illegal, or unenforceable
in any respect, such invalid, illegal or unenforceable provision or provisions
shall be fully severable and shall not affect any other provision of this
Agreement; and this Agreement shall be construed and enforced as if such
invalid, illegal, or unenforceable provision had never been contained herein.
20.6. Headings; Exhibits The headings used for the sections and articles
------------------
in this Agreement are for convenience and reference purposes only and will in no
way affect the meaning or interpretation of the provisions of this Agreement.
Any and all Exhibits referred to in this Agreement are, by such reference,
incorporated herein and made a part of this Agreement for all purposes.
20.7 Survival All indemnity and audit rights shall survive the
--------
termination of this Agreement. All obligations provided in this Agreement shall
remain in effect for the purpose of complying herewith.
20.8 No Third Party Beneficiaries Nothing in this Agreement will
-------------------------------
provide any benefit to any third party or entitle any third party to any claim,
cause of action, remedy or right of any kind, it being the intent of the Parties
that this Agreement shall not be construed as a third party beneficiary
contract.
26
<PAGE>
20.9 Status of the Parties Nothing in this Agreement, nor in the
------------------------
relationship between Exxon and POC and any Affiliate of either Exxon or POC, is
intended to create nor shall be deemed to constitute a partnership or joint
venture or any other similar relationship.
20.10 Counterparts This Agreement shall be executed in duplicate
------------
originals, with one original to be retained by POC and one original retained by
Exxon. This Agreement may be executed in several counterparts, each of which
shall be an original and all of which constitute one and the same instrument.
20.11 Time of the Essence Time is of the essence for all provisions of
---------------------
this Agreement.
20.12 Construction of Agreement Both Parties have contributed to the
---------------------------
drafting of this Agreement. Any ambiguities or uncertainties in the wording
shall not be construed for or against either Party.
IN WITNESS WHEREOF, the Parties, by their respective duly authorized
representatives, have executed this Agreement effective as of the Effective
Date. This Agreement shall not become effective as to either Party unless and
until executed by both Parties.
PENN OCTANE CORPORATION EXXON COMPANY, U.S.A.
a Delaware corporation (a division of Exxon Corporation)
By: __________________________ By: ___________________________
Title: _______________________ Title: ________________________
Date Signed: ________________ Date Signed __________________
SCHEDULE OF EXHIBITS:
- ----------------------
Exhibit "A" Specifications
Exhibit "B" Measurement and Sampling
Exhibit "C" Diagram of Meters
Exhibit "D" Letter of Credit Requirements
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT "A"
TO PURCHASE, SALE AND SERVICE AGREEMENT
FOR PROPANE/BUTANE MIX
KING RANCH GAS PLANT
PRODUCT SPECIFICATIONS
ITEM LIMIT METHOD
- ------------------------------------------------------------------------------------
PROPANE BUTANE MIX(3)
------- ------ ------
Composition: %LV
- -----------------
<S> <C> <C> <C> <C>
Propane - Min 95 N.A. ___ ASTM D2163
Butane - Min N.A. 95 ___1 & 2) ASTM D2163
Butane & heavier - max 3 -- -- ASTM D2163
Pentane & heavier - max -- 5 5 ASTM D2163
CO2 0.1 0.1 0.1 ASTM D2163
Ethane - max < 2 N.A. N.A. ASTM D2163
Methane - max 1.5 % of ethane N.A. N.A. ASTM D2163
Corrosion - copper strip - max No.1 No.1 No.1 ASTM D1838
Total Sulfur - ppmw - max 123 140 140 ASTM D2784-89
Free water/moisture content none none none
Vapor pressure @ 100 F - psia 208 70 185 ASTM D1267-89
<FN>
Notes: 1 The maximum butane in the MIX may be revised as a result of a change in specifications
issued by a regulatory agency of the Mexican Government
2. Exxon may exceed ____ (___) volume % butane in the MIX with prior written consent of POC.
3. POC will be responsible for monitoring and correcting spec problems from off spec
propane delivered to the Plant from CCPL.
</TABLE>
28
<PAGE>
EXHIBIT "B"
TO PURCHASE, SALE AND SERVICE AGREEMENT
FOR PROPANE/BUTANE MIX
KING RANCH GAS PLANT
NATURAL GAS LIQUID MEASUREMENT PROCEDURES
SECTION I - METERING EQUIPMENT
Products delivered or received per this Agreement shall be measured by MASS
MEASUREMENT PROCEDURES using a turbine meter.
Each measuring station shall be equipped with: a flow computer capable of
totalizing gross volume, net volume and mass; pressure and temperature
transmitters; and a densitometer that measures density at flowing conditions in
gm/cc. Exxon monitors compliance of Exxon produced/delivered propane and butane
using on-line chromatographs.
The measuring station shall be installed in such a manner that a minimum
back-pressure of 50 psig above the product vapor pressure at maximum operating
temperature is maintained at all times. Measurement accuracy shall not be
impeded by the effects of pulsation created by pumps or other sources.
All equipment employed in metering and sampling shall be approved as to the
type, materials of` construction, method of installation, and maintenance by all
persons involved in the custody transfer of Products. Due consideration shall
be given to the operating pressure, temperature, and characteristics of the
product being measured.
TURBINE METERS shall be installed and operated in accordance with the API Manual
- -------------- ----------
of Petroleum Measurement Standards, Chapter 5, Sections 3 & 4. Each turbine
- -------------------------------------
meter shall be proved by a ball or piston-type prover in accordance with the API
---
Manual of Petroleum Measurement Standards, Chapter 4.
- ---------------------------------------------
DENSITOMETERS shall be installed and proved in accordance with the API Manual of
- ------------- -------------
Petroleum Measurement Standards, Chapter 14, Section 6. Proving is to be
- ---------------------------------
accomplished by entrapping a sample of the flowing stream at system conditions
in a high-pressure vessel known as a pycnometer.
FLOW COMPUTERS shall be installed capable of accepting turbine pulses and
- ---------------
signals from the pressure, temperature, and density densitometer transmitters.
The computer shall convert, as required, and totalize these signals into gross
volume, mass, and net volume. For net volume determinations, the computer shall
utilize the latest ASTM, API, and GPA tables for temperature, pressure and
specific gravity correction that are applicable to the product being measured.
COMPOSITE SAMPLING SYSTEM, if used, shall be operated to collect
- ---------------------------
flow-proportional samples only when there is flow through the meter. These
samples shall be accumulated in and removed from single-piston cylinders with
mixing capability.
Meters, instruments, and check meters shall be calibrated at least once each
Month. Sufficient notice shall be given to all parties to permit a
representative of each to be present.
Reference to any API, GPA, ASTM, GPA, or similar publication shall be deemed to
encompass the latest edition, revision, or amendments thereof.
29
<PAGE>
SECTION II - ACCOUNTING AND MEASUREMENT PROCEDURES
I. GENERAL
A. Exxon shall operate and maintain custody/transfer measurement
facilities at the King Ranch Gas Plant for measurement of Products
hereunder.
B. Persons involved in the custody transfer of Products shall exchange
measurement data during the Month to facilitate detection and
resolution of measurement problems in a timely manner.
C. Persons involved in the custody transfer of Raw Make and Finished
Products shall notify each other of modifications to their
respective metering installations, maintain records of such changes,
and make such records available to each other upon request.
II. CUSTODY TRANSFER TICKETS
A. For streams which are measured on a MASS basis, custody tickets will
be furnished stating the total mass measured in pounds. The equivalent volume
in Barrels of liquid Products computed at standard conditions will also be
furnished. Custody transfer tickets for Products shall be generated on time
basis per the Agreement for a Month.
III. MEASUREMENT BASIS
MASS MEASUREMENT
Mass measurement procedures shall be employed on Products unless otherwise
provided in this Agreement.
Mass Measurement shall be accomplished utilizing a turbine meter,
densitometer, and flow computer to convert gross volumetrically measured Barrels
using density in gm/cc at flowing conditions to total pounds mass according to
the following formula:
(Gross Barrels)(Meter Factor)(Density at Operating Conditions in
gm/cc)(350.506987)=Total pounds Mass 350.506987 is the conversion factor to
convert gm/cc to lbs/barrel.
Total pounds mass shall be converted to equivalent Gallons of each Product
utilizing the calculation procedure outlined in GPA Standard 8173-83, and the
Product weights in a vacuum in accordance to GPA Standard 2145-94. Component
Gallons will be further reduced to Barrels.
IV. PROVINGS AND TOLERANCES
As flow passes through the turbine meter blades, this causes the blades to
turn. As each blade edge passes through the magnetic field of the pick-up coil,
a pulse is generated. The pulses then are converted to a square wave frequency
by the electronic module mounted on the turbine meter. This frequency signal is
then sent to the flow computer to establish flow rates. Once the signal is
showing flow, there are two ways to show correct gross barrel flow. Pulse per
barrel and a meter correction factor are used to do this. After a meter is
proved, one can choose to adjust the factory set pulses per barrel which will
then be referred to as a "K" Factor. If that choice is made, then meter
correction factor remains at 1.0000. If the adjustment is made at the meter
correction factor, then the pulses per barrel will remain set at standard pulses
per barrel for that particular meter.
30
<PAGE>
The densitometer factor is entered into the flow computer to correct
flowing density in gm/cc as determined by results of a pychometer test. The
pycnometer shall be installed so that flow through the vessel will assure proper
purging thus allowing temperature and pressure equalization with the
densitometer being proved. Maximum allowable temperature differential between
the contents in the pycnometer and the densitometer shall be no greater than +/-
1.0 F. The pressure shall be equal to that of the densitometer at time of
removal.
A. GENERAL
1. Meter provings, calibration of instruments, and maintenance of
measurement equipment will normally be performed by Operator personnel, but
these functions may be delegated to responsible third-party contractors under
the direction of an Operator representative.
2. At least twenty-four notice shall be given to all Persons
involved in the custody transfer of Products to permit a representative of each
to be present at meter provings and instrument calibrations.
3. Persons involved in the custody transfer of Products shall
cooperate to ensure that calibration/provings are scheduled and performed to
allow lockout of the flow computer, not to exceed one hour for each computer, to
avoid metering discrepancies during proving.
4. A Person's witness signature does not constitute the approval
of the use of out-of-tolerance equipment, but said signature does attest to the
validity of the proving report.
B. PROVING INTERVALS
Each meter shall be proven when initially placed into service.
Subsequent provings shall be made on a monthly basis. The meter shall be proven
immediately after any meter maintenance is performed.
C. METER FACTOR
1. The average of five (5) consecutive prover runs shall be taken to
establish an initial or new meter factor, provided that the five (5) proving
runs are within 0.0005 of each other and the meter factor is within 0.0025 of
the previous meter factor under like operating conditions.
2. If the new meter factor deviates less than 0.0025 from the
previous meter factor, the effective date for accounting with the new factor
will be the date of the proving and the new meter factor will remain effective
until the next proving. A custody transfer ticket should be written.
3. If the new meter factor deviates from the previous meter factor
under like operating conditions by more than plus or minus 0.0025, then one half
(1/2) of the volume measured since the previous proving shall be corrected using
the new meter factor. If the time of malfunction can be determined by
historical data, then the volume measured since that point in time shall be
corrected using the new meter factor. The new meter factor shall not be used to
correct volumes measured more than 31 days prior to the new proving.
4. No work shall be performed on the measuring element of a
turbine meter without first proving the meter. If any work is performed, a new
meter factor shall be established.
31
<PAGE>
5. If the new meter factor deviates more than 0.0025 but less than
0.0050 from the previous meter factor, the field representatives Persons
involved in the custody transfer of Products shall determine the corrective
action to be taken.
6. If the new meter factor deviates 0.0050 or more, the element
shall be removed and inspected. If there is build-up on the internals, then the
element shall be cleaned and the meter reproved. If excessive wear is found,
then the element shall be repaired or replaced and the meter reproved to
establish a new initial meter factor.
7. The measurement technician shall record all required
corrections to measured volumes and shall describe the findings, method of
repair, and calculations used in making the correction on the meter proving
report. A correction ticket for the amount of the correction shall be issued.
D. DENSITY FACTOR
The proving intervals, repairs, and methods of correction are the same
as outlined in paragraph B and paragraph C.2 to C.6. A single pycnometer
proving is sufficient.
V. CUSTODY MEASUREMENT STATION FAILURE
If a failure occurs on a custody measurement station or the station is out
of service while product is being delivered, then the quantity shall be
determined or estimated by one of the following methods in the order stated upon
mutual agreement of the Persons involved in the custody transfer:
1. By using data recorded by any check measuring equipment that was
accurately registering; or
2. By correcting the error if the percentage error can be ascertained
by calibrations, tests, or mathematical calculations; or
3. By comparison with deliveries made under similar conditions when the
measurement station was registering accurately.
VI. SAMPLING PROCEDURES
If used, flow proportional composite samples of Products shall be analyzed
in accordance with GPS Standard 2177-89.
A. If a malfunction of the sampling equipment occurs resulting in no
sample being taken or in an unrepresentative sample being obtained, the
following procedure shall be utilized in the order stated:
1. The sample collected by an on-steam back-up sampling device
that has extracted a sample in proportion to the volume delivered shall be used;
or
2. An average of the composite samples taken over the last three
(3) Months of properly sampled deliveries or a daily grab sample shall be used
for the time in question.
32
<PAGE>
TECHNICAL PUBLICATIONS
1. Manual of Petroleum Measurement Standards, American Petroleum Institute,
Washington D. C., First Edition, July 1976:
(a) Chaper 1, "Definitions"
(b) Chapter 4, "Proving System"
(c) Chapter 5.3, "Turbine Meters"
(d) Chapter 5.4, "Instruments or Accessory Equipment of Liquid
Hydrocarbon Metering Systems"
(e) Chapter 9.2, "Pressure Hydrometer Test Method for Density or
Relative Density"
(f) Chapter 12.2, "Calculations of Petroleuym Quantities"
(g) Chapter 14.6, "Installation and Proving Density Meters Used to
Measure Hydrocarbon Liquids with Densities between 0.3 and 0.7
gm/cc at 15.56 C (60 F) and Saturation Vapor Pressure"
2. GPA Standard 2140-84 "Liquefied Petroleum Gas Specifications and Test
Methods"
3. GPA Standard 2145-94 "Table of Physical Constants of Paraffin
Hydrocarbons and Other Components of Natural Gas"
4. GPA Standard 2174-83 "Method of Obtaining Hydrocarbon Fluid Samples Using
a Floating Piston Cylinder"
5. GPA Standard 2177-89 "Method for the analysis of Demethanized Hydrocarbon
Mistures Containing Nitrogen and Carbon Dioxide by Gas Chromatography"
6. GPA Standard 8173-83 "Method for Converting Natural Gas Liquids and
Vapors to Equivalent Liquid Volumes"
7. GPA Standard 8182-82 "Tentative Standard for the Mass Measurement of
Natural Gas Liquids"
References to any API, GPA, or ASTM publication shall be deemed to encompass the
latest edition, revision or amendment, thereof.
33
<PAGE>
EXHIBIT "C"
TO PURCHASE, SALE AND SERVICE AGREEMENT
FOR PROPANE/BUTANE MIX
KING RANCH GAS PLANT
See attached Diagram of Meter Locations
34
<PAGE>
EXHIBIT "D"
TO PURCHASE, SALE AND SERVICE AGREEMENT
FOR PROPANE/BUTANE MIX
KING RANCH GAS PLANT
LETTER OF CREDIT REQUIREMENTS
-----------------------------
As required under Section 9.1, POC shall provide to Exxon a letter of credit
("LC") to cover all of POC's payment obligations set forth in Article 6 of this
Agreement. The LC shall be issued in a format, for an amount, by a bank and for
a time duration acceptable to Exxon. Credit balances shall be monitored by
Exxon, and amendments to the LC may be required from time to time when it
appears that the credit 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 throughout the Term.
LC Determination A calculation of the amount of the LC for any Calendar
- -----------------
Month will be made on or before the fifth (5th) Business Day preceding such
Calendar Month using projected volumes and prices as follows:
PRICE Exxon will provide an estimate of the Propane Index Price and the
- -----
Butane Index Price for the Calendar Month to be covered by the LC.
VOLUME POC will provide projections for Exxon Equity Product receipts
- ------
at the Delivery Point, Exxon Equity Propane receipts at the Alternate Delivery
Point(s) and POC Propane deliveries across CCPL Propane Meter #2 and
Ella-Seadrift Propane Meter #3 for such Calendar Month. Exxon will provide
Exxon Equity Propane Plant production projections for delivery to POC across
Plant Propane Meter #1 for such Calendar Month.
LC CALCULATION Exxon will determine the amount of the LC requirements
- ---------------
for the Calendar Month to be issued by calculating the sum of the following
items:
Item 1 - Exxon projected Exxon Equity Propane deliveries x estimated Propane
- -------
Index Price (adjusted for discounts and/or premiums)
Item 2 - (POC projected POC Propane deliveries across CCPL Propane Meter #2 and
- -------
Ella-Seadrift Propane Meter #3 plus Exxon projected Exxon Equity Propane
deliveries) x 0.1 x estimated Butane Index Price (adjusted for discounts and/or
premiums)
Item 3 - POC projected POC Propane deliveries across CCPL Propane Meter #2 x EPC
- ------
Tariff
Item 4 - (POC projected POC Propane deliveries across CCPL Propane Meter #2 and
- -------
Ella-Seadrift Propane Meter #3) x 1.1 x Blending and Pumping Fee
Item 5 - Projected Delivery Deficiency Fee based on Item 3 projections
- -------
35
<PAGE>
Item 6 - Projected Purchase Deficiency Fee based on POC projections of Exxon
- -------
Equity Product receipts at the Delivery Point Exxon Equity Propane receipts at
the Alternate Delivery Point(s)
NOTE: Items 5 and 6 will be adjusted for prior month's credit.
Item 7 - Projected Pumping & Blending Deficiency Fee based on Item 3
- -------
projections.
Item 8 - Any alternate disposition costs projected to be incurred by Exxon
- -------
pursuant to 6.9.
Item 9 - Any residual payment obligations from the preceding Calendar
- -------
Month.
Any balance remaining on the LC from the prior Calendar Month which remains
undrawn shall be credited towards the amount of the LC for the succeeding
Calendar Month.
Weekly Update Exxon Treasurers Credit representative will calculate credit
- --------------
exposure, based on actual activity and any adjustments to projections of volume
or the Propane Index Price and Butane Index Price, and will communicate any
required adjustments to the existing LC to POC either verbally or by facsimile.
Exxon will have the right to restrict or interrupt Exxon Equity Product and Mix
deliveries under this Agreement until an adequate LC is
36
<PAGE>
SALES/PURCHASE AGREEMENT
BETWEEN
PG&E NGL MARKETING, L.P.
AND
PENN OCTANE CORPORATION
FOR
PRODUCT
AT
PG&E'S SHOUP PLANT
OCTOBER 1, 1999
PG&E NGL Marketing, L.P. and any other company referenced here which uses the
PG&E name or logo are not the same company as Pacific Gas and Electric Company,
the California Utility. These companies are not regulated by the California
Public Utilities Commission, and customer do not have to buy products from these
companies in order to continue to receive quality regulated services from the
utility.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE NUMBER TITLE PAGE NUMBER
- -------------- ------------------------ -----------
<C> <S> <C>
1 DEFINITIONS. . . . . . . 1
2 TERM . . . . . . . . . . 2
3 QUANTITY . . . . . . . . 2
4 DELIVERY POINT . . . . . 3
5 QUALITY. . . . . . . . . 4
6 PRICE. . . . . . . . . . 5
7 MEASUREMENT AND ANALYSIS 6
8 BILLING AND PAYMENT. . . 6
9 TAXES. . . . . . . . . . 9
10 WARRANTIES . . . . . . . 9
11 LIMITATION OF LIABILITY. 10
12 FORCE MAJEURE. . . . . . 10
13 WARNING. . . . . . . . . 12
14 INDEMNITY. . . . . . . . 13
15 WAIVER . . . . . . . . . 14
16 ASSIGNMENT . . . . . . . 14
17 NOTICES. . . . . . . . . 14
18 CONFIDENTIALITY. . . . . 15
19 GOVERNING LAW. . . . . . 16
20 HEADING. . . . . . . . . 16
21 MODIFICATION . . . . . . 16
22 ENTIRE AGREEMENT . . . . 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONT.)
<S> <C>
EXHIBIT A PRODUCT SPECIFICATION
EXHIBIT B MEASUREMENT & SAMPLING
EXHIBIT C MATERIAL SAFETY DATA SHEETS
</TABLE>
<PAGE>
PRODUCT
SALES/PURCHASE AGREEMENT
Effective upon completion of delivery facilities and first deliveries of
Product, estimated to be October 1, 1999 ("Effective Date"), PG&E NGL MARKETING,
L.P., a limited partnership organized under the laws of the state of Delaware,
whose principle address is 1100 Louisiana Street, Suite 900, Houston, Texas
77002 ("Seller") and PENN OCTANE CORPORATION, a Delaware corporation, having an
office at 1110 Kingwood Drive, Suite 200L, Houston, Texas 77060 ("Buyer"), enter
into this Agreement for the sale and purchase of a propane stream ("Product")
produced at Seller's Shoup Fractionator. Seller and Buyer are sometime
hereinafter referred to as the "Parties" and individually as a "Party".
ARTICLE 1
---------
DEFINITIONS
-----------
1.0 The following terms when used in this Agreement shall have the following
meanings:
1.1 "Barrel" means forty-two Gallons.
1.2 "Contract Year" means the twelve Month period beginning as of the first
day of October, 1999, and each successive twelve Month period thereafter.
1.3 "Shoup Fractionator" refers to Seller's Shoup Fractionation Plant
located in Nueces County, Texas.
1.4 "Gallon" means one U.S. standard liquid gallon containing two hundred
and thirty-one cubic inches at a temperature of sixty degrees Fahrenheit and at
the equilibrium pressure of the liquid pressured.
1.5 "Month" means a period commencing at nine (9:00) a.m., local time, on
the first day of a calendar month and ending at nine (9:00) a.m., local time, on
the first day of the next succeeding calendar month.
1.6 "Pound" means a unit of weight equivalent to sixteen ounce avoirdupois.
1
<PAGE>
1.7 "Price" means the price per Gallon of Product determined in accordance
with Article 6 hereof.
1.8 "Product" shall mean a predominantly propane stream which shall conform
to the specifications in Article 5.1 herein.
ARTICLE 2
---------
TERM
----
2.1 This Agreement shall be in effect for an initial term
___________________commencing upon completion of delivery facilities and first
deliveries of Product estimated to be October 1, 1999, and for additional terms
of one (1) year each, provided that either party may terminate this Agreement at
the end of the initial term or any subsequent one year term by giving net less
than six (6) months prior written notice to the other Party.
ARTICLE 3
---------
QUANTITY
--------
3.1 Seller shall sell and Buyer shall purchase a monthly average of
- -----_________________plus/minus 10% at Seller's option.
3.2
3.3
3.4 In the event Seller loses feedstock in its system, as a result of
reduced production from the natural gas plants supplying feedstocks to Seller's
Shoup Fractionator, for reasons other than Force Majeure, such that Seller''
total volume of Propane is insufficient to meet Seller's obligations, then
Seller shall allocate available volumes to its customers on a ratable basis.
Such reduction of production shall include but not be limited to reductions due
to processing economics, or due to reduced gas volumes as a result of reduced
drilling or producing activity. Buyer's allocated volumes shall be determined
by multiplying Buyer's minimum contract volume by a fraction, the numerator of
which is the total available volume of propane at Seller's Shoup Fractionation
Plant and the denominator of which is the total minimum contract volume of all
of Seller's propane sales contracts at Seller's Shoup Fractionation Plant.
Seller shall provide Buyer with written notice of planned reductions as soon as
reasonably possible.
2
<PAGE>
ARTICLE 4
---------
DELIVERY POINTS
---------------
4.1 The Product to be sold hereunder shall be delivered or caused to be
delivered by Seller to Buyers, or Buyer's designated representative for the
account of Buyer, by pipeline at the Points of Delivery set forth below.
4.2 The Point of Delivery for all Product sold and delivered hereunder shall
be i) Seller's meter station at a newly constructed interconnected between
Seller's propane pipeline and the Exxon 12" propane pipeline located near Rand
Morgan road in Nueces County, Texas and ii) Seller's meter station located at
the existing interconnect of Seller's propane pipeline with the Seadrift Ella
Pipeline, located in Nueces County, Texas. Seller shall own, operate and
maintain at its sole cost and expense the meter and delivery facilities located
at the Points of Delivery.
4.3 Title and risk of loss to all Product sold hereunder shall pass from
Seller to Buyer at the Points of Delivery.
4.4 The delivery pressure shall be sufficient to allow Product to enter
Buyer's or Buyer's designee's pipeline at the Points of Delivery at the then
prevailing operating pressure therein, which may vary from time to time, but
Seller shall not be obligated to deliver at a pressure in excess of 600 psig to
the Exxon pipeline or 1,000 psig to the Seadrift pipeline.
ARTICLE 5
---------
QUALITY
-------
5.1 The Product shall meet the specification ("Specifications") set forth in
Exhibit A. If the Product does not meet the Specifications, the Party becoming
aware of such failure shall immediately notify the other Party and Seller shall
use best efforts to immediately correct or cause to be corrected such failure,
so as to deliver Product conforming to the Specifications. If Seller is unable
to deliver Product conforming to the Specification, Buyer may at its election
accept or reject deliveries of such off-specification Product.
3
<PAGE>
5.2 If accepted by Buyer the Product shall be paid for as outlined in
Article 6, Price. Buyer's acceptance of Product that does not conform to the
Specifications shall not constitute a waiver of such Specifications by Buyer
regarding Product subsequently delivered under this Agreement after such
acceptance.
ARTICLE 6
---------
PRICE
-----
6.1
6.2
a)
b)
c)
ARTICLE 7
---------
MEASUREMENT AND ANALYSIS
------------------------
7.1 All aspect of measurement and analysis regarding Product deliveries
under this Agreement shall be conducted in accordance with the provisions of
Exhibit B which is attached hereto and incorporated by reference. It is
understood that the measurement and analytical equipment described in Exhibit B
shall be installed, owned and operated by Seller.
4
<PAGE>
ARTICLE 8
---------
BILLING AND PAYMENT
-------------------
8.1 Buyer shall maintain during the entire term of this Agreement an
irrevocable stand-by Letter of Credit ("LC") issued from a "A" rated bank,
acceptable to Seller, in sufficient amount to secure amounts due to payable to
Seller. Expiration of the LC should be no earlier than 45 days after
termination of the contract.
8.2 On or before the fifth (5th) work Day of each Month Seller shall render
an invoice showing the quantity of Product, by individual components, purchased
and sold hereunder during the preceding Month, and the amount due. Duplicate
original invoices shall be mail to:
Penn Octane Corporation
Attn: Accounts Payable
1110 Kingwood Drive, Suite 200L
Houston, TX 77060
8.3 Buyer shall pay invoices(s) by wire transfer or automated clearing house
("ACH") within ten (10) working days from the date of Seller's invoice, without
any adjustments (unless such adjustments are for invoiced amounts disputed in
good faith), discounts or set-offs. Buyer shall include in the wire transfer or
ACH detail, the invoice number(s), source of payment, and amount of payment. In
the event the payment due date falls on a Saturday or New York bank holiday
other than a Monday New York bank holiday, payment shall be due on the
immediately preceding New York banking day. In the event the payment due date
falls on a Sunday or Monday New York bank holiday, payment shall de due on the
next succeeding New York banking day.
8.4 Seller reserves the right to withhold delivery of Product to Buyer at
any time Buyer's payments becomes five (5) days past due, provided that Seller
gives Buyer five (5) days prior written notice of such default and its intent to
withhold delivery. If at the end of such five (5) day period, Buyer has not
cured its default, Seller may withhold delivery of Product upon forty eight (48)
house notice. If Buyer becomes current in its payments, Seller shall resume
deliveries of Product hereunder. Seller shall have the right to terminate this
Agreement if such default is not cured within sixty (60) days from Seller's
delivery of the notice of default to Buyer. The foregoing rights to withhold
delivery and terminate this Agreement shall not apply to failure to pay which
such payments are disputed in good faith. Buyer shall have no obligation to pay
for any Product withheld by Seller pursuant to this section.
5
<PAGE>
8.5 Buyer shall pay interest on all past due invoices at the then effective
prime rate of interest as published under "Money Rates" by The Wall Street
---------------
Journal on the date the invoice is due, plus two percentage points above the
- -------
published rate, from the date due until the date of payment. Interest shall be
calculated by multiplying the total amount due by the daily interest rate by the
number of days past due. In addition, Buyer shall pay all costs and expenses,
including reasonable attorney fees, incurred by Seller in collecting past due
payments.
8.6 In the event either Party shall (i) make an assignment or any general
arrangement for the benefit of creditors, (ii) default in the payment
obligation, (iii) file a petition or otherwise commence, authorized, or
acquiesce in the commencement of a proceeding or cause under any bankruptcy or
similar law for the protection of creditors or have such petition filed or
proceeding commenced against it which remains unvacated and unstayed for more
than 60 days; or (iv) otherwise becomes bankrupt or insolvent (however
evidenced); then the other Party shall have the right to either withhold
payment and/or suspend deliveries or terminate the Agreement upon 48 hours prior
written notice.
8.7 Each shall have the right, using third party auditors at its own
expense, upon reasonable notice and at reasonable times, to examine the books
and records of the other Party only to the extent reasonable necessary to verify
the accuracy of any statement, change, payment or computation made under this
Agreement. All invoices and billings will be conclusively presumed final and
accurate unless objected to in writing, with adequate explanation and/or
documentation, within two years after the month of delivery. All retroactive
adjustments under this Section 8.7 shall be pain in full by the Party owing
payment within 30 days of notice and substantiation of such inaccuracy.
6
<PAGE>
ARTICLE 9
---------
TAXES
-----
9.1 Seller agrees to pay any and all property taxes, fees, or other charges
imposed or assessed by governmental or regulatory bodies, the taxable incident
of which occurs prior to the transfer of title to Buyer.
9.2 Buyer agrees to pay any and all property taxes, fees, or other charges
imposed or assessed by governmental or regulatory bodies, the taxable incident
of which occurs after transfer of title to Buyer.
9.3 Any and all taxes, fees, or other charges imposed or assessed by
governmental or regulatory bodies, the taxable incident of which is the transfer
of title or the delivery of the Product hereunder, or the receipt of payment
therefor, regardless of the character, method of calculation, or measure of the
levy or assessment, shall be paid by the Party upon whom the tax, fee, or
charges is imposed by law.
9.4 Buyer shall furnish Seller with an exemption or resale certificate or
other document necessary to comply with any applicable sales and use tax laws.
ARTICLE 10
----------
WARRANTIES
----------
10.1 Seller warrants that it has title to the Product delivered under this
Agreement, that the Product shall be free from all liens, encumbrances and
security interests, and that the Product shall meet the Specifications set forth
in Exhibit A. THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
WARRANTIES OF MERCHANTABILITY OR FITNESS OF THE PRODUCT FOR A PARTICULAR
PURPOSE, EVEN IF SUCH PURPOSE IS KNOWN TO SELLER.
7
<PAGE>
ARTICLE 11
----------
LIMITATIONS OF LIABILITY
------------------------
11.1 Neither party shall be liable on any claim under or arising out of or
for breach of this Agreement unless such action to enforce such claim is brought
not later than two years from the date of cause of action arose.
11.2 IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT, WHETHER
IN WARRANTY, CONTACT, OR TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR
OTHERWISE, FOR ANY INCIDENTAL OR CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES
WITHOUT REGARD TO THE CAUSE OR CAUSES RELATED THERETO, INCLUDING, WITHOUT
LIMITATION THE NEGLIGENCE OF ANY PART, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR
CONCURRENT, OR ACTIVE OR PASSIVE.
ARTICLE 12
----------
FORCE MAJEURE
-------------
12.1 No failure or omission by either party to carry out or observe any of
the terms or conditions of this Agreement, including, but not limited to such
party's delay or failure to perform as a result of such party's failure to
manufacture, deliver, receive, transport, use, or consume Product due to
occurrences set forth below, shall, except in relation to obligations to make
payments under this Agreement for Product sold and delivered, give rise to any
claim against the party in question or be deemed a breach of the Agreement to
the extent such failure or omission arises from the cause reasonably beyond the
control of the party, including but not limited to:
(a) Compliance (voluntary or involuntary) with laws, decrees, guidelines,
requests, or like of any government or person authorized to act therefor, or of
international organizations of which the United States is a member including,
without limitation, the international Energy Agency.
8
<PAGE>
(b) Restriction or cessation of production of Product by reason of the
imposition by any government or person acting under the color or claim of any
governmental authority of conditions or requirements which make it necessary to
cease or to reduce the production or use of the Product.
(c) Hostilities of war (declared or undeclared), embargoes, blockades, civil
unrest, riots or disorders, terrorism, or sabotage.
(d) Fires, explosions, lightning, maritime peril, collisions, storms,
landslides, earthquakes, floods, and other acts of nature.
(e) Strikes, lockouts, or other labor difficulties (where or not involving
employees of Seller or Buyer).
(f) Disruption or breakdown of facilities or equipment, or shortage or
interruption of supply of labor, or materials affecting facilities engaged in
production, transportation or use of Product.
(g) Closing or restrictions on the use of harbors, railroads or pipeline.
(h) Freezing of wells or lines of pipelines or inability to secure
rights-of-way.
(i) Any substantial reduction in availability of feedstock and/or other
materials necessary to make Product.
(j) Any other cause, whether or not of the same class of kind, beyond the
control of either party which prevents or interferes with the performance of
this Agreement.
12.2 Notwithstanding the provisions of Article 12.1 hereof, nothing
contained in this Agreement shall relieve Buyer of the obligation of pay in full
the purchase price of any other amounts due for the Product actually delivered
hereunder.
12.3 Upon the occurrence of any of the Force Majeure events described in
Article 12.1 hereof, the party claiming Force Majeure shall notify the other
party promptly in writing of such event and, to the extent possible, inform the
other party of the expected duration of the Force Majeure event and the
quantities of Product to be affected by the suspension or curtailment of
performance under this Agreement.
12.4 No curtailment or suspension of deliveries or acceptance of deliveries
pursuant to this Section shall operate to extend the period of this Agreement or
to terminate this Agreement. Neither Seller nor Buyer shall have any obligation
to make up deliveries or purchases of Product that were suspended during the
force Majeure event.
9
<PAGE>
ARTICLE 13
----------
WARNING
-------
13.1 The Material Safety Data Sheet attached hereto as Exhibit C contains
information regarding health risks and recommendations for the safe use and
handling of such Product. Buyer acknowledges and represents that it has read
and understands the material Safety Data Sheet, and warnings. Buyer's
obligations in this regard will include but not be limited to (i) warning the
employees of Buyer and its affiliates who may become exposed to such Product of
the hazards described in such documents; (ii) taking measures to assure that
such employees have appropriate safety equipment which is adequately maintained
and properly used and that all precautions contained in the Material Safety Data
Sheet, and other warnings are followed; and (iii) warning third parties,
including but not limited to Buyer's customers who may use or be exposed to such
product, of such hazards, and requiring that the precautions contained in such
Material Safety Data Sheet, and other warnings are followed. If Buyer does not
so comply with its obligation with respect to all hazards disclosed in such
Material Safety Data Sheet, or warnings, Buyer will indemnify and hold Seller
harmless from any claims, causes of action, liabilities losses or expenses on
account of injury or death of person and/or damage to property arising directly
out of Buyer's failure to fulfill its obligations under this paragraph.
10
<PAGE>
ARTICLE 14
----------
INDEMNITY
---------
14.1 To the fullest extent permissible by law, Buyer agrees to indemnify,
defend with counsel of Buyer's choice, and hold Seller harmless from and against
any and all claims, demands, liabilities, losses, costs and expenses (including
reasonable attorney's fees and costs of investigation and/or litigation), causes
of action, and damages (exclusive of consequential, incidental, punitive,
exemplary, and indirect damages) (i) following the commencement of deliveries of
Product hereunder at the Delivery Point(s) and downstream from the Delivery
Point(s) or (ii) that arise out of the violation of any federal, state, or local
regulations by Buyer or its employees or agents in connection with the
performance of this Agreement.
14.2 To the fullest extent permissible by law, Seller agrees to indemnify,
defend with counsel of Seller's choice, and hold Buyer harmless from and against
any and all claims, demands, liabilities, losses, costs and expenses (including
reasonable attorneys' fees and costs of investigation and/or litigation), causes
of action, and damages (exclusive of consequential, incidental, punitive,
exemplary, and indirect damages) asserted against Buyer (i) upstream of the
Delivery Point(s) prior to the commencement of deliveries of Product hereunder
or (ii) that arise out of the violation of any federal, state, or local
regulations by Seller or (ii) its employees or agents in connection with the
performance of this Agreement.
14.3 IT IS THE INTENT OF THE PARTIES THAT THIS INDEMNITY AND THE LIABILITY
ASSUMED UNDER IT BE WITHOUT REGARD TO THE CAUSE(S) THEREOF, INCLUDING, WITHOUT
LIMITATION, THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, WHETHER SUCH NEGLIGENCE BE
SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE; PROVIDED, NEITHER PARTY SHALL
BE LIABLE IN RESPECT OF ANY CLAIM TO THE EXTENT SAME RESULTED FROM THE GROSS
NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH OF THE INDEMNIFIED PARTY.
11
<PAGE>
ARTICLE 15
----------
WAIVER
------
15.0 No waiver, either express, or by course of dealing or course of
performance, of any of the terms and conditions contained in this Agreement, or
waiver of any breach of any of the terms and conditions contained in this
Agreement, shall be construed as a subsequent waiver of any of the terms and
conditions of this Agreement or as a waiver of any subsequent breach of the same
or any other term or condition of this Agreement.
ARTICLE 16
----------
ASSIGNMENT
----------
16.0 Neither party shall assign this Agreement without the prior written
consent of the other party, which consent shall not be unreasonable withheld.
ARTICLE 17
----------
NOTICES
-------
17.0 All notices required or permitted by the terms of this Agreement shall
be deemed sufficient if given by personal delivery, telegram, telex, or
facsimile, or by prepaid, certified mail and addressed to the Seller and to the
Buyer as follows:
To Seller: PG&E NGL MARKETING, L.P.
P.O. Box 1244
Houston, Texas 77251
Attention: Director, NGL Marketing
Telephone No: (713) 371-6116
Fax No: (713) 371-6903
To Buyer: PENN OCTANE CORPORATION
1110 Kingwood Drive, Suite 200-L
Houston, Texas 77060
Attn: Vice president
Telephone No: (281) 359-4479
Fax No: (381) 359-4587
12
<PAGE>
17.1 Notices of change of address, facsimile to telephone numbers, or
designated department or individuals of either party shall be given in writing
to the other party.
ARTICLE 18
----------
CONFIDENTIALITY
---------------
18.0 During the term of this Agreement Seller and Buyer will maintain the
confidentiality of this Agreement and will not disclose the terms hereof to any
third party, except independent auditors who are under written obligations of
confidentiality with respect to this Agreement, and as may be required in the
option of such party's counsel to comply with orders of any court or
governmental agency, or comply with any laws, rules and regulations of
applicable governmental agencies, including without limitation, federal and
state securities laws and authorities. The obligations of confidentiality
hereunder will not apply to any such information which is or becomes, through no
fault of the respective party, generally known to the public, or which was
previously known to the respective party or is received by the respective party
from a third party who warrants it is legally free to disclose such information.
ARTICLE 19
----------
GOVERNING LAW
-------------
19.0 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, U.S.A. WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAW. THE PARTIES HERETO AGREE THAT VENUE AND JURISDICTION WILL LIE IN
HOUSTON, HARRIS COUNTY, TEXAS.
13
<PAGE>
ARTICLE 20
----------
HEADING
-------
20.0 The section headings contained in this Agreement are for the
convenience of the parties only and shall not be interpreted as part of this
Agreement.
ARTICLE 21
----------
MODIFICATION
------------
21.0 This Agreement shall not be modified except by written instrument
executed by duly authorized representatives of the respective Parties.
ARTICLE 22
----------
ENTIRE AGREEMENT
----------------
22.0 This Agreement, including all Exhibits, contains the full and complete
understanding of the parties with respect to the purchase and sale of Product.
This Agreement shall not be affected by the acknowledgment or acceptance by
Seller or Buyer of purchase orders, acknowledgements, sales orders, releases or
any other form submitted by the other Party, which contain other or different
terms and conditions from those included in this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their authorized representatives as of the day and year first above written.
PG&E NGL MARKETING, L.P. PENN OCTANE CORPORATION
by PG&E NGL Hydrocarbons Company
its General Partner
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
14
<PAGE>
EXHIBIT A
SPECIFICATION FOR PROPANE
PG&E SHOUP FRACTIONATOR
THE PROPANE SHALL BE FREE FROM OILS, SOLVENTS, ALCOHOL, DIRT, FOREIGN MATTER AND
OTHER CONTAMINANTS AND SHALL HAVE A COMPOSITION CONFORMING TO THE FOLLOWING:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Composition
- -------------------------
Vapor Pressure @ 100 F 208
Composition,(Liq. Vol%):
Butanes & Heavier 2.5
Propylene Content 5.0
Propane Content 90.0
Corrosion, Copper Strip 1.0
Total Sulfur,(PPMW) 123
Free Water Content None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
MEASUREMENT AND SAMPLING
CONTENTS PAGE
-------- ----
<S> <C> <C>
Section 1.0 Introduction 2
Section 2.0 General Criteria 2
Section 3.0 LPG Measurement by Orifice Meter 4
3.1 Orifice Run Criteria 4
3.2 Installation Considerations 6
3.3 Secondary Devices 7
3.3.1 Differential Pressure Transmitters 7
3.3.2 Static Pressure Transmitters 8
3.3.3 Temperature Transmitters 9
3.3.4 Product Analysis 9
3.3.5 Densitometers 12
3.3.6 Flow Computers 12
3.3.7 Calibration and Checking Procedures 13
3.4 Orifice Flow Calculation Procedure 14
Section 4.0 Final Accounting Procedure 15
4.1 Conversion to Liquid Volume 15
4.2 Registration Corrections 15
4.3 Statements 16
</TABLE>
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 2
- --------------------------------------------------------------------------------
Section 1.0 Introduction
------------
This document details criteria, equipment and procedures relevant to the,
measurement of LPG. It must be read in conjunction with the following flow
measurement standards, which are considered part of the document:
1) API Manual of Petroleum Measurement - 14.3, 14.6 latest edition, and
14.8.
2) GPA Standard 8173 - Latest Edition.
3) API Standard 2530 (AGA Report No 3) Second Edition.
Scope
-----
LPG or Product as used herein is meant to refer to propane, a predominantly
propane stream with minor amounts of carbon dioxide, methane, ethane and
butanes. Operational limits shall be as follows:
Pressure: 250 to 450 psig
Temperature: Maximum 120'F
Section 2.0 General Criteria
-----------------
1) The quantities of delivered LPG shall be measured and calculated in mass
pounds using an orifice meter with differential pressure, temperature and
pressure transmitters; densitometer, microprocessor-based flow
computertotalizer, printer, and composite sampler or on-stream analyzer.
2) The measurement facilities shall be designed, installed, maintained, and
operated, and have data accumulation features with sufficient quality to assure
overall flow measurement system uncertainty of no more than +1.0%.
-
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 3
- --------------------------------------------------------------------------------
3) The fluid measured shall always be maintained at a pressure and
temperature assuring that only a single phase shall exist. This fluid will be
measured in a liquid phase.
4) The procedures and methods used shall be applicable to high quality LPG.
5) Product analysis shall be determined by Seller's gas laboratory and
proved to both parties.
6) Either party, at their option and expense, may install check measuring
equipment in series with the other parties' measuring equipment; provided
however, that such check measuring equipment shall be so installed as not to
interfere with the operation of the other parties' measuring equipment. Each
party shall have access to all measuring equipment at reasonable hours, but
Seller shall be responsible for the reading, calibrating and adjusting thereof
of such measuring equipment.
7) Each party, at their option and expense, may install telemetry or
telephone equipment to communicate flow data and analysis; provided, however,
that such equipment does not interfere with operation or accuracy of the other
parties measuring equipment.
8) Seller shall remove meter ticket(s) from the meter station every fifteen
(15) days. Seller shall sent to Buyer copies of all tickets, and sample
analysis with calculations pertaining to LPG deliveries.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 4
- --------------------------------------------------------------------------------
9) Pulsation levels shall not degrade measurement quality. The maximum
allowable level of dynamic peak-to-peak differential pressure across the orifice
place shall not exceed 0.3 times the expected steady-state differential pressure
over the entire
facilities operating conditions. The dynamic differential pressure shall be
that as measured at the orifice meter taps.
Section 3.0 LPG Measurement by Orifice Meter
------------------------------------
3.1 Orifice Run Criteria
----------------------
The meter primary measuring device shall be an orifice run with a sharp edged
concentric orifice place. The meter tube and orifice place shall be designed,
sized and maintained to meet the following design criteria:
1) The combination of the orifice diameter (d) and the inside pipe diameter
(D) shall result in a Beta Ratio (d/D) between the limits of 0.20 and 0.60 for
2" to 6" meter tubes. Orifice Places, differential pressure device ranges or
even meter tube sizes shall be changed as needed to meet this design criteria.
Under special circumstances, other Beta Ratios may be utilized for short terms
if mutually agreed.
2) The primary element sizing results shall be such that the normal long
duration readings of the differential pressure will not be lower than 20 inches
of water nor greater than 400 inches of water. Very short duration, strictly
abnormal, readings of the differential pressure shall be maintained between 10
inches and 400 inches of water whenever the secondary device capability is
provided. The obvious need for multiple parallel differential rangeability
exceeding 4:1) will be discussed with the secondary device equipment. Orifice
plate size changing will be utilized, whenever practical, to maintain
differential pressures measuring devices at 20 percent to 90 percent of their
calibrated range.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 5
- --------------------------------------------------------------------------------
3.2 Installation Considerations
----------------------------
1) The central section of a meter run shall be vendor fabricated and
certified in accordance with ANSI/API-2530 (American Gas Association Report
No.3). The orifice meter tube shall have a dual chamber orifice fitting for
inspection of the orifice place without disrupting flow. In any type fitting
where plate carriers are used, seal rings shall be utilized and will be
inspected each time the place is removed and replaced if necessary. Provisions
shall be made for periodic inspection of the meter tube on a 1-2 year basis.
2) Pressure reduction valves, compressors, heat exchangers and other
equipment producing unsteady flow should be located at a distance great enough
so that measurable effects cannot be detected in the vicinity of the meter tube.
The upstream meter run length shall meet or exceed the requirements of
ANSI/API-2530 for Beta Ratio 0.7 installation configuration. The downstream
meter run shall be have a minimum length of 10 diameters. Two thermowells shall
be located in the primary element between 10 and 15 diameters downstream from
the orifice plate.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 6
- --------------------------------------------------------------------------------
3) The orifice plate shall be constructed of stainless steel and conform to
specifications meeting ANSI/API2530. Universal type places of 1/8 inch or
inch thickness shall be used as appropriate for meter run size. The orifice
bore size shall conform to standard sizes available in 1/8" increments.
3.3 Secondary Devices
------------------
Secondary devices utilized for the mass measurement shall be as follows and be
of sufficient quality to provide overall flow measurement uncertainty of one
percent maximum.
1) Differential pressure measurement devices used with orifice measurements
shall have vendor's specified inaccuracy of a maximum of +0.25 percent of
-
calibrated span with +0.10 percent being preferred. The ambient temperature
-
effect on the differential pressure device shall not exceed 1.0 percent of total
combined span and zero effect per 100 F. If a 0.25% D/P transmitter is used, a
heated housing (3.3.8) is required. If 0.1% D/P transmitter is used (i.e.,
"smart" transmitter) no heated enclosure is required. Differential pressure
devices shall be compensated by online computation for any vendor specified
static pressure effect (as with capacitance type detector). No single
differential pressure device shall be utilized over a differential rangeability
in excess of 4:1 (i.e. 100" to 25"). Two parallel devices should be utilized
for a rangeability up to 16:1, however, if absolutely necessary, a third
differential device could be utilized to provide differential rangeability to
64:1 (flow rangeability of 8:1). Expanded rangeabilities require sound
engineering judgement and require mutual consent of the Parties. Very low flow
rates at very low differentials could not be expected to provide a one percent
or less flow measurement uncertainly. Differential pressure measurement devices
shall not be utilized with calibration of less than one-half of its maximum span
rating.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 7
- --------------------------------------------------------------------------------
The meter run and orifice shall be properly sized and the facility operated in
such a manner that the normal long duration flow rates operates above 50 percent
(preferably about 75 percent) of the calibrated range of the primary
differential device.
2) Static Pressure Transmitters
------------------------------
The pressure device specifications should be equal to the differential pressure
device given above. The general specification should be at least +0.25 percent
-
of span accuracy with a stability effect of +0.25 percent over a six-month
-
period and an ambient temperature effect equal to or better than 1.0 percent of
total combined span and zero effect per 100 F. The static pressure device for
an orifice meter shall be connected to the downstream orifice tap.
3) Temperature Transmitter
------------------------
An RTD temperature sensor with a vendor specified accuracy of the transmitter
shall be +0.2 percent of span or less with the ambient temperature effect being
-
+0.3 percent of span per 100 F ambient temperature change. The location of the
RTD temperature sensor is between 10 and 15 diameters downstream of the orifice
plate. A test thermowell shall be located six inches downstream of the RTD
sensor for checking the primary temperature device at operating conditions.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 8
- --------------------------------------------------------------------------------
4) Product Analysis
-----------------
Automatic continuous sampling equipment for sampling the Product delivered by
Seller to Buyer under this Agreement shall be installed at the meter site or
other agreed upon location. The sampler shall be operated so it samples the
flowing stream proportional to the volume measured. The sampler shall be
located downstream of the meter and density meter but upstream of the back
pressure control valve. The sampler shall be operated at a pressure sufficient
to ensure a single phase liquid sample. The sampler shall be designed so as to
permit a thorough mixing of the samples and to accumulate a truly representative
sample of the Product passing through Seller's facilities. The sample shall
accumulate and continuous sample, or a continuous series of small withdrawals at
a frequency with shall vary directly with the delivery rate of flow of the
Produce.
The sample collection system shall be designed to contain the collected sample
in the liquid state. Buyer shall have the right to have a representative
present to witness the filling of sample containers and accordingly Seller shall
notify Buyer in advance of such activity. Obtaining a representative sample of
the product for transport to the laboratory shall be in accordance with GPA
Publication 2174 or Appendix B of API-2529.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 9
- --------------------------------------------------------------------------------
The composite sample collected as above described shall be analyzed at Seller's
expense. Sample shall be analyzed by a standard analytical procedure mutually
agreed to by Seller and Buyer to determine the composition.
If Buyer does not contest the analysis of Seller's laboratory within fifteen
(15) days after notification of the analysis, the remaining portion of the
sample will be released. The analysis of the mixture agreed upon by both
parties shall be used to determine the mol percent and liquid volume of each
component herein and for settlement purposes hereunder. The results of
analyses shall be applied to the
accounting period during which samples were taken. If the sampler becomes
inoperative during the month or if the sample is determined to be unsuitable,
the parties will agree upon the best method to accurately estimate the analysis
of the produce received.
Each party hereto, or its representative, may take samples for verification of
composition and may be present during any of the other party's sampling
operation, at its own risk, cost and expense.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 10
- --------------------------------------------------------------------------------
5) Densitometer
------------
The measurement facility shall be equipped with an on-line vibrating type
densitometer with an accuracy of +0.3% for determining the density at flowing
-
conditions. Installation should be in accordance with API Chapter 14.6. The
densitometer should be of quality wherein the effect of ambient temperature
changes are negligible. Any densitometer shall be installed downstream of the
metering tube (10 to 15 pipe diameters) and installed and operated in such a
manner that the temperature of the product in the densitometer will be within
one-half degree Fahrenheit (0.5 F) of product passing through the measurement
facility and so the pressure in the desitometer will be within three pounds per
square inch (3 psi) of the pressure of the product passing through the
measurement facility. An adequate driving force shall be provided for assuring
that proper flow is maintained through the desitometer. Online compensation of
density for pressure and temperature effects must be used for densitometers
requiring these corrections.
6) Flow Computers
---------------
Local mounted flow computers shall be utilized for determining mass flow rate
and accumulating mass flow totals. The computer shall have serial output and
printer capability, telemetry to be used in lieu of printer if available. A
"ticket" shall be automatically printed one each 24-hour period (or more often
if required) and contained time, date, current mass flow rate, factors, 24 hours
average pressure and temperature, density and accumulated mass flow. At lease
one electromechanical counter shall be included to accumulated mass flow.
Battery backup of UPS system shall be used for flow measurement system in case
of line power failure. A minimum of 24 hour uninterruptable service is
desirable. The vendor stated inaccuracy of the flow computer shall be not more
than +0.10 percent.
-
Chart recording of measured variables to quantity flow shall be used as backup.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 11
- --------------------------------------------------------------------------------
7) Calibration and Checking Procedures
--------------------------------------
All instruments shall be checked and calibrated at least monthly. Traceability
on pressure, differential pressure, temperature and density transmitters should
be provided where possible by checking with primary equipment certified and
traceable to the National Institute of Standards Technology (NIST). A written
detailed calibration, checking and maintenance procedure for the differential
pressure, and temperature devices shall be used. Reference to Chapter 14.6 of
the
API Petroleum Measurement Standards Manual should be made for calibration of
densitometers.
For maintenance, the manufacturer's instruction and operating manuals must be
followed. Adequate spares and special equipment at to be available to perform
maintenance and reduce downtime.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 12
- --------------------------------------------------------------------------------
On a scheduled day of each month, or at other mutually agreed intervals, the
accuracy of the measurement facility shall be verified. Seller shall give Buyer
reasonable notice when such tests are to be made in order that Buyer's
representative will have the opportunity to witness all such verifications and
procedures and shall receive copies of all calculations and reports pertaining
thereto.
3.4 Orifice Flow Calculation Procedure
-------------------------------------
All orifice flow calculations shall conform to API/ANI-2530/AGA3 AGA Report No.
3, Rev. 1969 or latest revisions.
Section 4.0 Final Accounting Procedure
----------------------------
4.1 The resultant pounds mass will be converted to individual component
pounds mass or gallons by procedures represented in the latest issue of GPA
standard 8173 (Standard for Converting Natural Gas Liquids and Vapors to
Equivalent liquid Volumes). Conversion factors as published in GPA Publication
2145-83 or latest edition "Physical Constants of Paraffin hydrocarbons" will be
used in making calculations of individual components volumes.
4.2 Registration Corrections - any meter(s) found to be registering
-------------------------
inaccurately or out of service shall be adjusted to read accurately and placed
in service immediately. For any error in excess of one-half percent (0.5%) not
known or agreed upon for the period in which the meter was inaccurate or out of
service, the quantity of the stream shall be estimated by the first one of the
following methods which is feasible in the order listed below.
<PAGE>
EXHIBIT B
---------
MEASUREMENT AND SAMPLING
SHOUP PROPANE SALES
OCTOBER 1, 1999 PAGE 13
- --------------------------------------------------------------------------------
4.2.1 By using measurements from an accurate check meter which was
calibrated for such purpose, and was in operation during the period the custody
meter was registering inaccuracy, or,
4.2.2 By correcting the error if the percentage of error is ascertainable by
calibration test, or calculation; or
4.2.3 By comparison with quantities flowing under similar conditions when
the meter was registering accurately and by the use of pertinent records.
4.2.4 The method used shall be agreed upon by both parties. The correction
shall be retroactive for any period definitely known or agreed upon by the
parties, however, if they do not agree, it shall be retroactive for one-half of
the period elapsed since the last test of the measuring equipment affected not
to exceed sixteen (16) days.
4.3 Statements
----------
Seller will provide monthly statements including the following:
1) Total mass flow in pounds for specified period of time.
2) Copy of analysis of monthly composite sample to include CO2, methane,
ethane, ethylene, propylene, propane, isobutane, normal butane and isopentane
and heavier compounds.
3) Breakdown of individual component volumes in gallons.
<PAGE>
UNITED STATES DEPARTMENT OF STATE
Washington, D.C. 20520
PERMIT
AUTHORIZING PENN OCTANE CORPORATION
TO CONSTRUCT TWO PIPELINES CROSSING THE INTERNATIONAL
BOUNDARY LINE BETWEEN THE UNITED STATES AND MEXICO
FOR THE TRANSPORT OF LIQUEFIED PETROLEUM GAS (LPG) AND REFINED
PRODUCT (MOTOR GASOLINE AND DIESEL FUEL)
By the authority vested in me as Under Secretary of State for Political
Affairs of the United States (pursuant to Executive Order 11423 of August 16,
1968, as amended by Executive Order 12847 of May 17, 1993 (hereinafter "the
Order") and Department of State Delegation of Authority No. 128-1 of April 11,
1973) and subject to the conditions, provisions, and requirements hereinafter
set forth, permission is hereby granted to Penn Octane Corporation, a
corporation formed under the laws of the State of California, with its principal
place of business in Redwood, California, (hereinafter "the permittee") to
construct, maintain, and operate two pipelines crossing the international
boundary at a point near the Port of Brownsville, Texas for the transport of
liquefied petroleum gas (LPG) and refined product (motor gasoline and diesel
fuel) between the United States and Mexico. This permit shall be issued subject
to the notification and consultation requirements of sections 1(b), (c), (d) and
(f) of the Order.
The term "facilities" as used in this permit means the pipeline and any land,
structures, installations or equipment appurtenant thereto.
The term "United States facilities" as used in this permit means those parts of
the facilities located in the United States.
As stated in permittee's application of March 12, 1999, for a permit pursuant to
Executive Order 11423, as amended by Executive Order 12847, the United States
facilities of the pipeline project will consist of the following major
components:
<PAGE>
Two pipelines, at 8-5/8" and 6-5/8" diameters, approximately 15 miles in
length running from the Penn Octane terminal in the Port of Brownsville District
to a point approximately 97 degree 35 minutes east longitude and 23 degrees 57
minutes 30 seconds north latitude on the Rio Grande river. To the maximum
extent possible the pipeline route will utilize existing utility, road, drainage
ditch, and railroad rights-of-way.
The permittee shall maintain such metering facilities as are required by
the Commissioner of Customs, provided with an adequate proving system, to be
installed and operated in accordance with American Petroleum Institute Code No.
2202, and a suitable sampling device; the installation and operation of said
meter, proving system, and sampling device shall be subject to the approval of
the Commissioner of Customs. The conditions and times of meter reading, meter
proving, and sampling shall be as directed by the Commissioner of the Customs.
This permit is subject to the following conditions:
Article 1. The United States facilities and operations herein described shall
- -----------
be subject to all the conditions, provisions, and requirements of this permit
and any amendment thereof. This permit may be terminated at the will of the
Secretary of State of the United States or the Secretary's delegate or may be
amended by the Secretary of State of the United States or the Secretary's
delegate at will or upon proper application therefore. The permittee shall make
no substantial change in the location of the Untied States facilities or in the
operation authorized by this permit until such changes have been approved by the
Secretary of States of the Untied States or the Secretary's delegate.
Article 2. The operation and maintenance of the facilities shall be in all
- -----------
material respected as described in permittee's application filed in November of
1998, which was supplemented in April of 1999, for a permit pursuant to
Executive Order 11423, as amended by Executive Order 12847.
Article 3. The construction, connection, operation, and maintenance of the
- -----------
Untied States facilities shall be subject to inspection and approval by the
representatives of any Federal or States agency concerned. The permittee shall
allow duly authorized officers and employees of such agencies free and
unrestricted access to said facilities in the performance of their official
duties.
- 2 -
<PAGE>
Article 4. Permittee shall comply with all applicable Federal and States laws
- -----------
and regulations regarding the construction, operation, and maintenance of the
United States facilities and with all applicable industrial codes. The
permittee shall obtain requisite permits from Mexican authorities, as well as
the relevant states and local governmental entities and relevant federal
agencies.
Article 5. Upon the termination, revocation, or surrender of this permit, the
- -----------
United States facilities in the immediate vicinity of the international boundary
line shall be removed by, and at the expense of, the permittee within such times
as the Secretary of State of the United States or the Secretary's delegate may
specify, and upon the failure of the permittee to remove this portion of the
United States facilities as ordered, the Secretary of State of the United States
or the Secretary's delegate may direct that possession of such facilities be
taken and that they be removed at the expense of the permittee; and the
permittee shall have no claim for damages by reason of such possession or
removal.
Article 6. If, in the future, it should appear to the Secretary of
- -----------
Transportation that any facilities or operations permitted hereunder cause
unreasonable obstructions to the free navigation of any of the navigable waters
of the United States, the permittee may be required, upon notice from the
Secretary of Transportation, to remove or alter such of the facilities as are
owned by it so as to render navigation through such waters free and
unobstructed.
Article 7. This permit is subject to the limitations, terms, and conditions
- -----------
contained in any orders issued by any competent agency of the United States
Government or of the State of Texas with respect to the United States
facilities. This permit shall continue in force and effect only so long as the
permittee shall continue the operations hereby authorized in accordance with
such limitations, terms, and conditions.
Article 8. When, in the opinion of the President of the United States, the
- -----------
national security of the Untied States demands it, due notice being given by the
Secretary of State of the United States or the Secretary's delegate, the United
States shall have the right to enter upon and take possession of any of the
United States facilities or parts thereof; to retain possession, management, and
control thereof for such length of time as may appear to the President to be
necessary to accomplish said purposes; and thereafter to restore possession and
control to the permittee. In the event that the United States shall exercise
such right, it shall pay to the permittee just and fair compensation for the use
of such United states facilities upon the basis of a reasonable profit in normal
conditions, and the costs of restoring said facilities to as good conditions,
and the existed at the time of entering and taking over the same, less the
reasonable value of any improvements that may have been made by the United
States.
- 3 -
<PAGE>
Article 9. In the event of transfer of ownership of the United States
- -----------
facilities or any part thereof, this permit shall continue in effect temporarily
for a reasonable time pending submission of a proper identification by the
transferee for a new and permanent permit, provided that notice of such transfer
is given promptly in writing to the Department of States accompanied by a
statement by the transferee under oath that the United states facilities and the
operation and maintenance thereof authorized by this permit will remain
substantially the same as before the transfer pending issuance to the transferee
of a new and permanent permit.
Article 10. (1) The permittee shall maintain the United States facilities and
- ------------
every part thereof in a condition of good repair for their safe operation.
(2) The permittee shall save harmless and indemnify the United States from
any and all claims or adjudged liability arising out of the construction,
operation, or maintenance of the facilities, including but not limited to
environmental contamination from the release or threatened release or discharge
of hazardous substances and hazardous waste.
Article 11. The permittee shall acquire such right-of-way grants, easements,
- ------------
permits, and other authorization as may become necessary and appropriate.
Article 12. The permittee shall file with the appropriate agencies of the
- ------------
Government of the United States such statements or reports under oath with
respect to the Untied States facilities, and/or permittee's activities and
operations in connection therewith, as are now or as may hereafter be required
under any laws or regulations of the government of the united States or its
agencies.
Article 13. The permittee shall take all appropriate measures to prevent or
- ------------
mitigate adverse environmental impacts or disruption of significant
archeological resources in connection with the construction, operation and
maintenance of the United States facilities.
Article 14. The permittee shall notify the Department of State and the Texas
- ------------
Historical Commission if before or during construction historic or archeological
properties are located and, if construction has already started, will crease
construction immediately. The permittee acknowledges that historic and
archeological properties are protected under 49 u.s.c, Section 303 (formerly 4
(f)) and the permittee shall prepare a Section 4(f) statement if the United
States facilities will have an effect on any historic or archeological
properties.
- 4 -
<PAGE>
Article 15. The permittee shall comply with all agreed actions and obligations
- ------------
undertaken to be performed by it in the Application and Environmental Assessment
dated April 1999. Construction of the facilities shall be performed in
conformity with the proposal contained in the Application and Environmental
Assessment dated April 1999.
Article 16. The permittee shall send notice to the Department of State of the
- ------------
United States at such time as the connection authorized by this permit is made
at the international boundary line between the United States facilities and the
facilities located in Mexico.
IN WITNESS WHEREOF, I, Thomas Pickering, Under Secretary of State for Political
Affairs of the Unites States, have hereunto set my hand this _______ day of
________, 1999 in the City of Washington, District of Columbia.
- 5 -
<PAGE>
This Amendment is made as of June 18, 1999 by and among the following parties:
Penn Octane Corporation and P.M.I. Trading Limited. The two foregoing parties
are parties to a contain LPG Mix Purchase Agreement, dated as of September 28,
1998, under DTIR-073-98, concerning the purchase of LPG Mix (90% propane and 10%
commercial butane) EXW Brownsville, TX, at Penn Octane's loading rack (the "LPG
Mix Agreement").
Witnesseth:
Whereas, both Parties desire to extend the term of the Contract and to reflect
an increment in the price for volumes of LPG Mix exceeding 7,000,000 gal in
summer and 9,000,000 gal in winter.
Nowtherefore, both parties hereby agree to amend the "LPG Mix Agreement' as
specified below.
1. (5) TERM
----
IT SAYS:
"UNLESS EITHER PARTY BREACHES ITS OBLIGATION UNDER THIS AGREEMENT, THE TERM
SHALL BE ONE YEAR COMMENCING ON OCTOBER 1ST, 1998 AND CONCLUDING ON SEPTEMBER
30, 1998.
IN CASE SELLER OBTAINS LEGAL RIGHTS TO IMPORT PROPANE INTO MEXICO OR/AND IF
BURGOS BASIN STARTS PRODUCING, THEN EITHER PARTY SHALL HAVE THE RIGHT TO NOTIFY
THE OTHER PARTY ITS INTENTION TO BEGIN A RENEGOTIATION PROCESS OF THIS CONTRACT.
SUCH RENEGOTIATION PROCESS SHALL START NO LATER THAN 10 DAYS AFTER THE
NOTIFICATION IS GIVEN. RENEGOTIATION PROCESS CAN NOT ENDURE MORE THAN 90 DAYS.
IF AN AGREEMENT IS REACHED DURING THE RENEGOTIATION PROCESS THIS CONTRACT SHALL
BE MODIFIED BY MUTUALLY AGREEMENT, OTHERWISE EITHER PARTY SHALL HAVE THE RIGHT
TO CANCEL.
It shall say:
"UNLESS EITHER PARTY BREACHES ITS OBLIGATION UNDER THIS AGREEMENT, THE TERM
SHALL BE EIGHTEEN MONTHS COMMENCING ON OCTOBER 1ST, 1998 AND CONCLUDING ON MARCH
31, 2000.
IN CASE SELLER OBTAINS LEGAL RIGHTS TO IMPORT PROPANE INTO MEXICO OR/AND IF
BURGOS BASIN STARTS PRODUCING, THEN EITHER PARTY SHALL HAVE THE RIGHT TO NOTIFY
THE OTHER PARTY ITS INTENTIONS TO BEGIN A RENEGOTIATION PROCESS OF THIS
CONTRACT. SUCH RENEGOTIATION PROCESS SHALL START NO LATER THAN 10 DAYS AFTER
THE NOTIFICATION IS GIVEN. RENEGOTIATION PROCESS CAN NOT ENDURE MORE THAN 30
DAYS. IF AN AGREEMENT IS REACHED DURING THE RENEGOTIATION PROCESS THIS CONTRACT
SHALL BE MODIFIED BY MUTUALLY AGREEMENT, OTHERWISE EITHER PARTY SHALL HAVE THE
RIGHT TO CANCEL."
<PAGE>
2. (6) VOLUMES
-------
It says:
"6.1. BUYER WILL SCHEDULE, PURCHASE AND ACCEPT AND SELLER WILL DELIVER AN ANNUAL
VOLUME OF "LPG MIX" EQUAL TO 81,180,000 GALLONS +/- 15% AT BUYER'S OPTION,
COMPLYING WITH THE FOLLOWING MINIMUM MONTHLY VOLUMES:
SUCH VOLUMES TO BE REFERRED HEREIN AS "MINIMUM MONTHLY VOLUME"
--------------------------
SEASONALITY IS DEFINED AS DESCRIBED BELOW:
- -----------------------------------------------
WINTER SEASON SHALL MEAN THE PERIOD FROM OCTOBER 1998 THROUGH MARCH 1999.
- --------------
SUMMER SEASON SHALL MEAN THE PERIOD FROM APRIL 1999 THROUGH SEPTEMBER 1999."
- --------------
It shall say:
"6.1. BUYER WILL SCHEDULE, PURCHASE AND ACCEPT AND SELL WILL DELIVER AN ANNUAL
VOLUME OF "LPG MIX" EQUAL TO 134,120,000 GALLONS +/- 15% AT BUYER'S OPTION,
COMPLYING WITH THE FOLLOWING MINIMUM MONTHLY VOLUMES:
SEASONALITY IS DEFINED AS DESCRIBED BELOW:
- -----------------------------------------------
WINTER SEASON SHALL MEAN THE PERIOD FROM OCTOBER 1998 THROUGH MARCH 1998, AND
- --------------
THE PERIOD FROM OCTOBER 1999 THROUGH MARCH 2000.
SUMMER SEASON SHALL MEAN THE PERIOD FROM APRIL 1999 THROUGH SEPTEMBER 1999."
- --------------
3. Both parties Agree that all the volume loaded during any month shall be
used to compute the service cost with the formula described in section 8.4.
4. In Clause (7) PRICE, Section 7.3 shall be included as per the following
-----
wording:
"7.3. THE VOLUME EXCEEDING 7,000,000 GAL IN JUNE 1999, SHALL HAVE A PREMIUM OF
____ USD/GAL TO THE VOLUME OF THE COMMODITY. DURING ANY OTHER MONTH AFTER JULY
1999, THE VOLUME EXCEEDING 7,000,000 GAL IN SUMMER AND 9,000,000 GAL IN WINTER
SHALL HAVE A PREMIUM OF ____ USD/GAL TO THE VOLUME OF THE COMMODITY."
- 2 -
<PAGE>
5. Clause (23) YEAR 2000 COMPLIANCE. Shall be included as per the following
---------------------
wording:
"(23) YEAR 2000 COMPLIANCE.
EACH OF SELLER AND BUYER REPRESENTS AND WARRANTS THAT IT WILL USE REASONABLE
BEST EFFORTS TO ENSURE THAT THE SUPPLY OF THE PRODUCT BY SELLER SOLD UNDER THIS
AGREEMENT, INCLUDING DELIVERIES BY SELLER TO BUYER, AND BUYER'S ACCEPTANCE OF
THE PRODUCT AND PAYMENT OF THE PURCHASE PRICE, SHALL BE YEAR 2000 COMPLIANT AND
GLOBAL POSITIONING SYSTEM ROLLOVER COMPLIANT, INCLUDING, BUT NOT LIMITED TO,
ACCURATELY PROCESSING DATE/TIME DATA (INCLUDING, BUT NOT LIMITED TO,
CALCULATING, COMPARING, AND SEQUENCING), FROM, INTO, AND BETWEEN THEN TWENTIETH
AND TWENTY FIRST CENTURIES, THE YEARS 1999 AND 2000, THE CHANGE OF DATE FROM
AUGUST 21, 1999 TO AUGUST 22, 1999, AND LEAP YEAR CALCULATIONS."
6. The "LPG Mix Agreement" is amended only in the terms specified above.
There are not other changes or amendments thereto. As so amended, the "LPG Mix
Agreement" continues in effect according to its terms.
Failing receipt any objection to the above by June 30, 1999, at 10:00 a.m., we
shall consider to foregoing as final and binding.
Leopoldo Simon Agree by
Authorized Officer Jorge Bracamontes
Penn Octane Corporation
LFV
- 3 -
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT.
<TABLE>
<CAPTION>
U.S. SUBSIDIARIES
Name of Subsidiaries State of Organization Trade Names
- ---------------------------------------- ----------------------- -----------
<S> <C> <C>
Penn Wilson CNG, Inc. Delaware None
Penn CNG Holdings, Inc. Delaware None
FOREIGN SUBSIDIARIES
Name of Subsidiaries Country of Organization Trade Names
- ---------------------------------------- ----------------------- -----------
PennWill, S.A. de C.V. Mexico None
Camiones Ecologicos, S.A. de C.V. Mexico None
Grupo Ecologico Industrial, S.A. de C.V. Mexico None
Estacion Ambiental, S.A. de C.V. Mexico None
Estacion Ambiental II, S.A. de C.V. Mexico None
Serinc, S.A. de C.V. Mexico None
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 1032265
<SECURITIES> 0
<RECEIVABLES> 3104587
<ALLOWANCES> 521067
<INVENTORY> 615156
<CURRENT-ASSETS> 4273458
<PP&E> 4888700
<DEPRECIATION> 1717050
<TOTAL-ASSETS> 8908708
<CURRENT-LIABILITIES> 4598659
<BONDS> 258617
0
900
<COMMON> 118456
<OTHER-SE> 3932076
<TOTAL-LIABILITY-AND-EQUITY> 8908708
<SALES> 35337935
<TOTAL-REVENUES> 35337935
<CGS> 32044194
<TOTAL-COSTS> 32044194
<OTHER-EXPENSES> 2074169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 521418
<INCOME-PRETAX> 1124558
<INCOME-TAX> 0
<INCOME-CONTINUING> 1124558
<DISCONTINUED> (579113)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 545445
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
