UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 Identification No.)
Incorporation or Organization)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 368-1501
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----
The number of shares of Common Stock, par value $.01 per share, outstanding
on June 11, 1999 was 11,188,830.
1
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<CAPTION>
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
<S> <C> <C>
Part I 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1999 (unaudited)
and July 31, 1998 3-4
Consolidated Statements of Operations for the three and nine months
ended April 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended April 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-18
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19-25
Part II 1. Legal Proceedings 26
2. Changes in Securities 26
3. Defaults Upon Senior Securities 26
4. Submission of Matters to a Vote of Security Holders 26
5. Other Information 26
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26-29
</TABLE>
2
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PART I
ITEM 1.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 30,
1999 July 31,
(Unaudited) 1998
------------ ----------
<S> <C> <C>
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 675,804 $ 157,513
Trade accounts receivable, less allowance for doubtful accounts of $418,796 and $418,796. 2,174,292 1,195,653
Inventories (note D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483,797 377,097
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . 95,789 90,851
------------ ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,429,682 1,821,114
Property, plant and equipment - net (note C) . . . . . . . . . . . . . . . . . . . . . . . 3,161,441 2,908,251
Lease rights (net of accumulated amortization of $512,906 and $478,560). . . . . . . . . . 641,133 675,479
CNG assets held for sale (note E). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,293,137
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,708 -
------------ ----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,471,964 $6,697,981
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30,
1999 July 31,
(Unaudited) 1998
--------------- ---------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (notes G and H). . . . . . . . . . . 705,599 $ 1,693,897
Revolving line of credit (note I) . . . . . . . . . . . . . . . . . . . . - 991,823
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 3,002,942 2,050,575
Borrowings from IBC-Brownsville (note L). . . . . . . . . . . . . . . . . - 672,552
1,739,288 1,555,262
--------------- ---------------
Accrued liabilities
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 5,447,829 6,964,109
Long-term debt, less current maturities (note G) . . . . . . . . . . . . . - 60,000
Commitments and contingencies (note I) . . . . . . . . . . . . . . . . . . - -
Stockholders' Equity (note H)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
0 convertible shares issued and outstanding at April 30, 1999 and
July 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Series B - Senior Preferred stock-$.01 par value, 5,000,000 shares
authorized; 90,000 and 0 shares issued and outstanding at April 30,
1999 and July 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 900 -
Common stock-$.01 par value, 25,000,000 shares authorized;
11,188,830 and 9,952,673 shares issued and outstanding at April 30,
1999 and July 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 111,889 99,527
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 15,830,489 13,318,592
Notes receivable from the president of the Company and a related party
for exercise of warrants, less reserve of $223,000 at April 30, 1999 and
July 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,763,006) ( 2,763,006)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,156,137) ( 10,981,241)
--------------- ---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 3,024,135 ( 326,128)
--------------- ---------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 8,471,964 $ 6,697,981
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
April 30, April 30, April 30, April 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,841,244 $ 7,840,952 $23,672,837 $24,197,199
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . 7,933,161 7,240,120 21,256,379 22,295,428
------------ ------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 908,083 600,832 2,416,458 1,901,771
------------ ------------ ------------ ------------
Selling, general and administrative expenses
Legal and professional fees. . . . . . . . . . . . . . . . . . . 117,404 122,971 544,103 470,990
Salaries and payroll related expenses. . . . . . . . . . . . . . 223,467 210,710 640,165 543,117
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,679 42,827 111,784 123,926
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,279 187,174 449,479 366,393
------------ ------------ ------------ ------------
563,829 563,682 1,745,531 1,504,426
------------ ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 344,254 37,150 670,927 397,345
Other income (expense)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (134,951) ( 100,535) ( 428,025) ( 260,144)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 1,442 59,476 2,739 176,336
Award from litigation (note L) . . . . . . . . . . . . . . . . . - - 987,114 -
------------ ------------ ------------ ------------
Income (loss) from continuing operations before taxes. . . . . 210,745 ( 3,909) 1,232,755 313,537
Provision for income taxes. . . . . . . . . . . . . . . . . . . . - - - -
------------ ------------ ------------ ------------
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . 210,745 ( 3,909) 1,232,755 313,537
Discontinued operations, net of taxes (note E)
(Loss) from operations of CNG segment. . . . . . . . . ( 72,666) ( 39,155) ( 275,488) ( 222,372)
------------ ------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ 138,079 $ ( 43,064) $ 957,267 $ 91,165
============ ============ ============ ============
Income (loss) from continuing operations
per common share (note B) . . . . . . . . . . . . . . . . . . . . $ 0.01 $ ( 0.00) $ 0.11 $ 0.01
============ ============ ============ ============
Net income (loss) per
common share (note B) . . . . . . . . . . . . . . . . . . . . . . $ 0.00 $ ( 0.00) $ 0.08 $ ( 0.01)
============ ============ ============ ============
Income (loss) from continuing
operations per common share
assuming dilution (note B). . . . . . . . . . . . . . . . . . . . $ 0.01 $ ( 0.00) $ 0.10 $ 0.01
============ ============ ============ ============
Net income (loss) per
common share assuming dilution (note B) . . . . . . . . . . . . . $ 0.00 $ ( 0.00) $ 0.08 $ ( 0.01)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
Weighted average common shares outstanding. . . . . . . . . . . . 10,983,467 9,764,127 10,466,197 8,993,546
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
---------------------
April 30, April 30,
1999 1998
------------ --------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 957,267 $ 91,165
Adjustments to reconcile net income to net cash used in (provided by) operating
Activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 187,144 204,948
Amortization of lease rights . . . . . . . . . . . . . . . . . . . . . . . . . 34,345 34,346
Amortization of loan discount . . . . . . . . . . . . . . . . . . . . 141,382 56,250
Interest income from related party notes receivables . . . . . . . . . . . . . - ( 172,512)
Award from litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 987,114) -
Changes in current assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . ( 978,639) ( 2,449,635)
Related party receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24,592
Costs and estimated earnings in excess of billing on uncompleted contracts . . - 187,634
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 106,700) ( 121,526)
Prepaids and other current assets. . . . . . . . . . . . . . . . . . . . . . . 20,800 ( 28,768)
Deferred registration costs. . . . . . . . . . . . . . . . . . . . . . . . . . - ( 479,870)
Construction and trade accounts payable. . . . . . . . . . . . . . . . . . . . 978,644 1,674,565
Billings in excess of costs and estimated earnings on uncompleted contracts. . - ( 7,596)
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . - ( 11,010)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,258 274,008
------------ --------------
Net cash (used in) provided by operating activities . . . . . . . . . . . . 743,387 ( 723,409)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 337,475) ( 134,353)
CNG assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . - ( 983,445)
------------ --------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . ( 337,475) ( 1,117,798)
Cash flows from financing activities:
Revolving credit facilities. . . . . . . . . . . . . . . . . . . . . . . . . . ( 991,823) 386,328
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,500,000
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152,500 1,131,250
Reduction in debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 48,298) ( 938,850)
------------ --------------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . 112,379 2,078,728
------------ --------------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 518,291 237,521
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 157,513 31,142
------------ --------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 675,804 $ 268,663
============ ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 320,710 $ 244,495
============ ==============
Supplemental disclosures of noncash transactions:
Preferred stock, common stock and warrants issued. . . . . . . . . . . . . . . $ 1,385,385 $ 1,520,651
============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
6
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly International Energy Development Corporation
(IEDC) and The Russian Fund, a Delaware corporation, was incorporated on August
27, 1992. On October 21, 1993, IEDC acquired Penn Octane Corporation, a Texas
corporation, whose primary asset was a liquid petroleum gas (LPG) pipeline lease
agreement (Pipeline Lease) with Seadrift Pipeline Corporation (Seadrift), a
subsidiary of Union Carbide Corporation (Union Carbide). On January 6, 1995,
the Board of Directors approved the change of IEDC's name to Penn Octane
Corporation. The Company is engaged primarily in the business of purchasing,
transporting and selling LPG and has provided services and equipment to the
compressed natural gas (CNG) industry. Substantially all of the LPG sales
volume since inception has been to PMI Trading Limited (PMI), a subsidiary of
Petroleos Mexicanos (PEMEX), the Mexican state owned oil company.
In February 1997, the Company formed Wilson Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary, for the purpose of engaging in the
business of designing, constructing, installing and servicing equipment for CNG
fueling stations and related products for use in the CNG industry throughout the
world. The subsidiary's name was changed to PennWilson CNG, Inc. (PennWilson)
in August 1997.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary. In February 1998, the
Company formed PennWill, S.A. de C.V., Camiones Ecologicos, S.A. de C.V., Grupo
Ecologico Industrial, S.A. de C.V., Estacion Ambiental, S.A. de C.V., Estacion
Ambiental II, S.A. de C.V., and Serinc, S.A. de C.V. (collectively Estacion),
all Mexican corporations. To date there has not been significant operations for
any of these entities.
During May 1999, the Company sold certain CNG related assets to 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.
BASIS OF PRESENTATION
-----------------------
The accompanying financial statements include the Company and its
subsidiaries, PennWilson and Holdings (Company). All significant intercompany
accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of April 30,1999, the unaudited
consolidated statements of operations for the three and nine months ended April
30, 1999 and 1998, and the unaudited consolidated statements of cash flows for
the nine months ended April 30, 1999 and 1998 have been prepared by the Company
without audit. In the opinion of management, the financial statements include
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the unaudited consolidated financial position of the Company as
of April 30, 1999 and the unaudited consolidated results of operations for the
three and nine months ended April 30, 1999 and 1998, and unaudited consolidated
cash flows for the nine months ended April 30, 1999 and 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended July 31, 1998.
Certain reclassifications have been made to prior period balances to conform to
the current presentation. All reclassifications have been applied consistently
to the periods presented.
7
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - 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 FASB issued Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings Per Share", which supersedes Accounting Principles Board Opinion No.
15 (APB 15), "Earnings Per Share". The statement became effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Early adoption was not permitted.
The following table presents reconciliations from income (loss) per common share
to income (loss) per common share assuming dilution (see note H for the warrants
and convertible preferred stock):
<TABLE>
<CAPTION>
For the three months ended April 30,1999 For the nine months ended April 30,1999
----------------------------------------- -----------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations . . . . . . . . . . $ 210,745 - - $ 1,232,755 - -
--------------
Net income (loss) . . . . . . . 138,079 - - 957,267 - -
--------------
Less: Dividends on preferred
stock. . . . . . . . . . . . . ( 132,162) - - ( 132,162) - -
BASIC EPS
Income (loss) from continuing
operations available to
common stockholders. . . . . . 78,583 10,983,467 $ 0.01 1,100,593 10,466,197 $ 0.11
========== ==========
Net income (loss) available to
common stockholders . . . . . . 5,917 10,983,467 $ 0.00 825,105 10,466,197 $ 0.08
========== ==========
EFFECT OF DILUTIVE SECURITIES
Warrants. . . . . . . . . . . . - 96,167 - - 58,341 -
Convertible Preferred Stock . . - 237,273 - - 76,765 -
DILUTED EPS
Income (loss) from continuing
operations available to
common stockholders. . . . . . 78,583 11,316,907 $ 0.01 1,100,593 10,601,303 $ 0.10
========== ==========
Net income (loss) available to
common stockholders. . . . . . $ 5,917 11,316,907 $ 0.00 825,105 10,601,303 $ 0.08
============== ============= ========== ============== ============= ==========
</TABLE>
8
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
For the three months ended April 30,1998 For the nine months ended April 30,1998
------------------------------------------ ------------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations . . . . . . . . . . $ ( 3,909) - - $ 313,537 - -
--------------
Net income (loss) . . . . . . . ( 43,064) - - 91,165 - -
--------------
Less: Dividends on preferred
stock. . . . . . . . . . . . . - - - ( 225,000) - -
BASIC EPS
Income (loss) from continuing
operations available to
common stockholders. . . . . . ( 3,909) 9,764,127 $ ( 0.00) 88,537 8,993,546 $ 0.01
=========== ===========
Net income (loss) available to
common stockholders. . . . . . ( 43,064) 9,764,127 $ ( 0.00) ( 133,835) 8,993,546 $ ( 0.01)
=========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants. . . . . . . . . . . . - - - - 596,280 -
Convertible Preferred Stock . . - - - - 666,607 -
DILUTED EPS
Income (loss) from continuing
operations available to
common stockholders. . . . . . n/a n/a $ n/a 88,537 10,256,434 $ 0.01
=========== ===========
Net income (loss) available to
common stockholders. . . . . . $ n/a n/a $ n/a n/a n/a $ n/a
============== ============= =========== ============== ============= ===========
</TABLE>
9
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
-------------- --------------
<S> <C> <C>
LPG:
Building. . . . . . . . . . . . . $ 173,500 $ 173,500
LPG terminal. . . . . . . . . . . 3,426,440 3,426,440
Automobile and equipment. . . . . 388,839 391,137
Office equipment. . . . . . . . . 35,738 35,738
Capital construction in progress. 504,913 75,389
Leasehold improvements. . . . . . 291,409 291,409
-------------- --------------
4,820,839 4,393,613
Less: accumulated depreciation and
amortization. . . . . . . . . . . ( 1,659,398) ( 1,485,362)
-------------- --------------
$ 3,161,441 $ 2,908,251
============== ==============
</TABLE>
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
LPG:
Pipeline . . $ 349,180 $276,938
LPG terminal 134,617 100,159
$ 483,797 $377,097
========= ========
</TABLE>
10
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - DISCONTINUED OPERATIONS
During May 1999, the Company and PennWilson completed the sale of assets related
to the CNG business to a company ("Buyer") controlled by a director and officer
of the Company. Under the terms of the sale, the Buyer purchased approximately
$1,200,000 of the CNG assets from the Company and PennWilson, consisting of
equipment, inventory, and intangible assets (the "Assets"). The Buyer did not
purchase any cash or accounts receivable, and did not assume any pre-existing
liabilities of the Company's CNG business. The selling price of the Assets was
based on the book values of the Assets, which approximates the fair market value
of the Assets sold, as of the date of closing.
In connection with the sale, the Company received promissory notes totaling
$1,200,000 from the Buyer (the "Notes"), which will be paid over sixty months or
earlier, under certain conditions. Proceeds received in connection with the
sale will be used to satisfy remaining obligations related to the Company's CNG
business and for working capital. In connection with the Notes, the Buyer has
pledged all the Assets as additional collateral, as well as proceeds to be
received from future sales of the Assets or from the leasing of the Assets.
Under the terms of the Notes, the Buyer paid $50,000 at closing and the officer
and director was required to pledge as additional collateral all stock held in
the Buyer and 200,000 warrants to purchase 200,000 shares of common stock of the
Company.
As a result of the sale, 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 Form 10-Q for
the quarterly period ended April 30, 1999. The Assets of the CNG segment to be
sold are presented separately for all periods presented. As a result of the
sale, the Company did not record any material gains or losses.
NOTE F - NYDOT CNG FUELING STATION
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 Environment ("AES"), that the Company was in default under the agreement
between AES and the Company relating to the NYDOT CNG fueling station. The
Company has responded to AES indicating that AES is in default with the terms of
the agreement and that the Company is awaiting satisfactory resolution of these
matters prior to completion of the remaining work outlined under the agreement.
The Company is currently exploring legal remedies available (see note I). As of
July 31, 1998, the Company revised its estimate related to the work preformed in
connection with the change-orders. As a result of this revision the Company
reduced revenues associated with the change-orders by $500,000 and recorded an
allowance for doubtful accounts of $321,994. In connection with this contract,
the Company does not anticipate a material amount of additional costs associated
with either completion of the contract or subsequent warranties provided for in
the contract.
For the three months and nine months ended April 30, 1998, the Company had
recorded additional revenues of $0 and $821,994, respectively, related to
change-orders in connection with the NYDOT CNG fueling station.
11
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
---------- ----------
<S> <C> <C>
Contract for Bill of Sale; due in semi-annual payments of $22,469, including interest
at 11.8%; due in October 1998; collateralized by a building.. . . . . . . . . . . . . $ 42,899 $ 91,197
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate due June 5, 2002 (note H).. . - 100,000
Note issued in connection with settlement of vendor obligation. Principal due in
monthly installments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,700 62,700
Promissory notes, with warrants to purchase up to 250,000 shares of common stock
at an exercise price of $6.00 per share expiring October 21, 2000 and warrants to
purchase up to 337,500 shares of common stock at an exercise price of $1.75 per
share expiring November 30, 2001; principal due June 30, 1999, or from proceeds
received by the Company from any public offering of debt or equity of the Company
in excess of $2,250,000. Promissory notes are secured by an assignment of net
proceeds received by the Company in connection with the Judgment; interest at
10.0% on the principal amount of the promissory notes is due quarterly on March
31, June 30, September 30 and December 31. The effective interest rate after
consideration of the discount, is 18.0% per annum. Purchasers of the promissory
notes were granted one demand registration right with respect to the shares issuable
upon exercise of the warrants (note H). . . . . . . . . . . . . . . . . . . . . . . . 600,000 1,500,000
705,599 1,753,897
Current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 705,599 1,693,897
---------- ----------
$ - $ 60,000
========== ==========
</TABLE>
NOTE H - STOCKHOLDERS' EQUITY
PREFERRED STOCK
----------------
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 preferred stockholders 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 shares of common stock of the Company was
recorded as a preferred stock dividend in the amount of $225,000 at January 30,
1998.
12
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - Continued
SERIES B, CLASS A SENIOR PREFERRED STOCK
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of the Company's Series B, Class A Senior
Preferred Stock (the Senior Preferred Stock) at a purchase price of $10.00 per
share. The Senior Preferred Stock is non-voting and dividends are payable at a
rate of 12% annually, payable in cash or in kind, semi-annually. The Senior
Preferred Stock may be converted in whole or in part at any time at a conversion
ratio of one share of Senior Preferred Stock for 4.0 shares of common stock of
the Company. In connection with the exchange, the holder of the Senior
Preferred Stock received 50,000 shares of common stock of the Company and may
receive an additional 50,000 shares of common stock of the Company, if the
Senior Preferred Stock is not redeemed by the Company prior to September 3,
1999. The Company has granted one demand registration right with respect to any
common stock of the Company which may be acquired and/or received by the holder
of the Senior Preferred Stock in connection with the transaction. The Company
and the holder of the Senior Preferred Stock have agreed to share the costs of
the registration. The issuance of the 50,000 shares of common stock of the
Company was recorded as a preferred stock divided in the amount of $115,000 at
April 30, 1999.
COMMON STOCK
-------------
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
12, 2000 for an amount of $250,000. Net proceeds from the sale were used for
working capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common
stock of the Company and warrants to purchase 300,000 shares of common stock
with an exercise price of $1.75 per warrant and an expiration date of December
13, 2003 for an amount of $500,000. Net proceeds from the sale 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 and the cancellation of any further obligation to
pay any future royalties in connection with Company's purchase of certain CNG
assets from Wilson Technologies Inc., a wholly owned subsidiary of ZHI.
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 $26,000 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 60,106 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.
13
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - Continued
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.
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
April 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 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 I - COMMITMENTS AND CONTINGENCIES
LITIGATION
On August 24, 1994, the Company filed an Original Petition and Application for
Injunctive Relief against the International Bank of Commerce-Brownsville
("IBC-Brownsville"), a Texas state banking association, seeking (i) either
enforcement of a credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly all of the Company's business and assets; (ii) declaratory relief
with respect to the credit facility; and (iii) an award for damages and
attorneys' fees. After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the "Judgment") confirming the arbitral award for $3,246,754 to the Company by
IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the Texas
Court of Appeals on January 21, 1997. The Company responded on February 14,
1997. On September 18, 1997, the appeal was heard by the Texas Court of Appeals
and on June 18, 1998, the Texas Court of Appeals issued its opinion in the case,
ruling essentially in favor of the Company. IBC-Brownsville sought a rehearing
of the case on August 3, 1998. 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. As of April 30, 1999, the net
amount of the Judgment is approximately $3,700,000, which is comprised of (i)
the original judgment, including attorneys' fees, (ii) post-award interest,
(iii) cancellation of the note and accrued interest payable to IBC-Brownsville,
less attorneys' fees. There is no certainty that IBC-Brownsville will not
continue to seek other legal remedies against the Judgment.
For the nine months ended April 30, 1999, the Company has recorded 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 L). The remaining net amount of the Judgment to be realized by the Company
is approximately $3,700,000, less attorneys fees. The Company will record the
remaining amount of the Judgment when it realizes the proceeds associated with
the Judgment.
14
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - Continued
On April 18, 1996, the Company reached an agreement (the "IBC Settlement
Agreement") to accept $400,000 to settle a lawsuit it filed in October 1995
against International Bank of Commerce-San Antonio, a bank related to
IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement, the
parties, including IBC-Brownsville and IBC-San Antonio, executed mutual releases
from future claims related to the IBC-Brownsville litigation. Additionally,
IBC-San Antonio agreed to indemnify the Company for any such claims made or
asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company (Case No.
96-06-3502) in the 357th Judicial District Court of Cameron County alleging that
the Company, in filing the Judgment against IBC-Brownsville in order to clear
title to its assets, slandered the name of IBC-Brownsville. IBC-Brownsville
contends that the Judgment against it prevented it from selling certain
property. IBC-Brownsville has claimed actual damages of $600,000 and requested
punitive damages of $2,400,000. On September 23, 1996, the court entered the
Judgment on behalf of the Company and indicated in a preliminary ruling that the
Company was privileged in filing the Judgment to clear title to its assets.
On July 30, 1996, the Company filed suit in the District Court of Harris County,
Texas against Jorge V. Duran, former Chairman of the Board of the Company,
regarding alleged conversion and fraud by Mr. Duran during his time as an
employee of the Company. The Company has not yet quantified its damages and is
seeking a declaration that the termination of employment of Mr. Duran was lawful
and within the rights of the Company based on Mr. Duran's status as an at-will
employee of the Company. On December 12, 1996, Mr. Duran filed a counterclaim
in the District Court of Harris County, Texas asserting the following claims:
breach of contract against the Company and Mr. Richter; wrongful discharge
against the Company, Mr. Richter, and Mr. Mark Casaday, a former officer and
director of the Company; defamation against the Company, Mr. Richter, Mr. Mark
Casaday, and Mr. Jorge Bracamontes; and interference with contract against Mr.
Jorge Bracamontes. On February 27, 1997, the two actions were consolidated into
Case No. 96-37447, Penn Octane Corporation v. Jorge V. Duran in the 164th
District Court of Harris County, Texas and on September 30, 1998, Mr. Duran
filed a Fourth Amended Original Petition. Mr. Duran is seeking judgment against
the Company and Messrs. Richter, Casaday and Bracamontes for damages in excess
of $12,000,000, including prejudgment interest as provided for by law, and
attorneys' fees and such further relief to which he may be justly entitled. The
Company intends to vigorously defend against Mr. Duran's counterclaim.
On October 14, 1998, a complaint was filed by Amwest Surety Insurance Company
("Amwest") naming as defendants, among others, PennWilson and the Company
seeking reimbursement for payments made 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 have already been recorded
in the Company's balance sheet at April 30, 1999. In addition, Amwest is
seeking reimbursement of approximately $600,000 for 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 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 related claims as to the
payment bond. The Company is currently considering its legal options and
intends to vigorously defend against the additional $600,000 for claims made
against the performance bond but not yet paid by Amwest (see note F).
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.
15
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - Continued
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
In connection with the PMI Sales Agreement, invoicing occurs weekly. From
November 1996 to early November 1997, the Company and PMI made an arrangement
under which PMI provided financing on the Company's behalf under the terms of
the Company's supply agreement with Exxon, the Company's main supplier. As a
result of this arrangement, invoicing occurred on a monthly, rather than a
weekly basis.
On October 22, 1997, the Company entered into a $6,000,000 credit facility with
RZB Finance L.L.C. (RZB) for demand loans and standby letters of credit (RZB
Credit Facility) to finance the Company's purchase of LPG and propylene (PPL).
Under the RZB Credit Facility, the Company pays a fee with respect to each
letter of credit thereunder in an amount equal to the greater of (i) $500, (ii)
1.5% of the maximum face amount of such letter of credit, or (iii) such higher
amount as may be agreed between the Company and RZB. Any amounts outstanding
under the RZB Credit Facility shall accrue interest at a rate equal to the rate
announced by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant to
the RZB Credit Facility, RZB has sole and absolute discretion to terminate the
RZB Credit Facility and to make any loan or issue any letter of credit
thereunder. RZB also has the right to demand payment of any and all amounts
outstanding under the RZB Credit Facility at any time. In connection with the
RZB Credit Facility, the Company granted a mortgage, security interest and
assignment in any and all of the Company's real property, buildings, pipelines,
fixtures and interests therein or relating thereto, including, without
limitation, the lease with the Brownsville Navigation District of Cameron County
for the land on which the Company's Brownsville Terminal Facility is located,
the Pipeline Lease, and in connection therewith entered into leasehold deeds of
trust, security agreements, financing statements and assignments of rent. Under
the RZB Credit Facility, the Company may not permit to exist any lien, security
interest, mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB. The
Company's President, Chairman and Chief Executive Officer has personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility. Upon establishment of the RZB Credit Facility, beginning
November 11, 1997, PMI no longer provided any financing on behalf of the
Company, and the Company began invoicing PMI on a weekly basis.
Effective April 22, 1998, the aggregate amount available under the RZB Credit
Facility was increased to $7,000,000. In January 1999, the fee charged for
letters of credit issued was increased to 2.5%.
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 April 30, 1999, letters of credit established under the RZB Credit
Facility in favor of Exxon and PG&E for purchases of LPG totaled $6,000,400 and
$335,000 of which $1,870,082 and $341,811 were being used to secure unpaid
purchases from Exxon and PG&E as of April 30, 1999. In connection with these
purchases, as of April 30, 1999, the Company had unpaid invoices due from PMI
totaling $1,849,769 and cash balances maintained in the RZB Credit Facility
collateral account of $717,816.
NOTE J - 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, has a deficit in working capital and is
delinquent under certain loan and lease agreements. In addition, the Company is
involved in litigation, the outcome of which cannot be determined at the present
time. As discussed in note A, the Company has historically depended heavily on
sales to one major customer.
16
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - 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 1) collect the Judgment, 2) increase
sales to its current customers, 3) increase its customer base, 4) extend the
terms and capacity of the Pipeline Lease and the Brownsville Terminal Facility,
5) expand its product lines and 6) raise additional debt and/or equity capital.
At July 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,826,000. The ability to utilize
such net operating loss carryforwards may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the Internal
Revenue Code.
NOTE K - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement (Agreement) with its major
customer, PMI, to provide a minimum monthly volume of LPG to PMI through
September 30, 1999. During October 1998, the Company was purchasing LPG on a
month-to-month basis from Exxon Company, U.S.A. (Exxon), its major supplier, to
meet the minimum monthly volumes required in the Agreement. Effective November
1, 1998, the Company entered into a supply contract with Exxon to purchase
minimum monthly volumes of LPG through September 1999 under payment terms
similar to those required in the Agreement. The supply price is below the sales
price provided for in the Agreement.
NOTE L - AWARD FROM LITIGATION
On December 31, 1998, the Company received notification from the Texas
Court of Appeals that the request by IBC-Brownsville for a rehearing of the
previous appellate decision upholding the judgment of The State District Court
(the "Judgment") against IBC-Brownsville in favor of the Company, was denied
(see note I).
As a result of that decision, IBC-Brownsville had exhausted all legal remedies
under the appeals process available to it. On February 16, 1999,
IBC-Brownsville petitioned the Supreme Court of Texas to hear its case. 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. There is no
certainty that IBC-Brownsville will not continue to seek other legal remedies
against the Judgment.
As a result of the above, the Company will record the gain when it realizes the
proceeds associated with the Judgment. Due to the fact that the Judgment
included an offset related to a liability, which the Company had recorded on its
balance sheet, the Company has realized a portion of the Judgment, which relates
to that liability. When the cash portion of the Judgment is collected, the
Company will record the remaining amount of the Judgment.
17
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - AWARD FROM LITIGATION - Continued
For the nine months ended April 30, 1999, the Company has recorded a gain to the
extent of the amount which was recorded as a liability on the Company's balance
sheet at December 31, 1998 totaling $987,114.
NOTE M - SUBSEQUENT EVENTS
During May 1999, the Company entered into separate settlement agreements
with a legal firm and a supplier (the "Creditors") in connection with prior
services performed for the Company. Under the terms of the settlements, the
Company has agreed to make specified payments totaling $550,000 to the
Creditors. At the time of the settlements, the Company had approximately
$614,000 of accrued liabilities recorded in connection with amounts owed to the
Creditors. 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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1999) refer to the Company's fiscal year ended July 31. The
results of operations related to the Company's CNG segment, primarily consisting
of PennWilson, which began operations in March 1997, have been included in the
Company's results of operations for fiscal 1999 and 1998, have been presented
separately as discontinued operations.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, since 1997, the provision of equipment and services to the
CNG industry. Beginning July 1994, the Company has bought and sold LPG for
distribution into northeast Mexico and the U.S. Rio Grande Valley.
Historically, the Company has derived substantially all of its revenues
from sales to PMI, its primary customer, of LPG purchased from Exxon. In fiscal
1998, the Company derived approximately 95% of its revenues from sales of LPG,
of which sales to PMI accounted for nearly 100% of total LPG sales.
As part of its business strategy, in March 1997 the Company acquired
certain assets and hired certain former employees from WTI, a company engaged in
the engineering, design and construction of equipment for turnkey CNG fueling
stations. In connection with this acquisition, the Company paid $394,000 and
was committed to pay up to $2.0 million in royalty payments based on future
sales, if any. The acquisition was accounted for as a purchase and has been
reflected as such in the Company's consolidated financial statements beginning
in fiscal 1997.
The Company's CNG revenues were previously derived from contracts awarded
on a fixed-price, as-completed basis. During May 1999, the Company entered into
an agreement to sell certain of the CNG assets. The Company is no longer
pursuing business opportunities related to CNG (see note E to the Consolidated
Financial Statements) and is once again focusing primarily on its LPG
operations, including the expansion of its pipeline facilities.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
variable posted prices that provide the Company with a fixed margin. Costs
included in costs of goods sold other than the purchase price of LPG may affect
actual profits from sales, including costs relating to transportation, storage,
leases, maintenance and financing. The Company generally attempts to purchase
in volumes commensurate with projected sales. However, mismatches in volumes and
prices of LPG purchased from Exxon and resold to PMI could result in
unanticipated costs.
19
<PAGE>
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price of LPG for the three and nine months ended April 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
April 30, April 30, April 30, April 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Volume Sold
LPG (millions of gallons) 30.7 23.6 84.7 64.8
Average sales price
LPG (per gallon). . . . . $ 0.29 $ 0.32 $ 0.28 $ 0.37
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1999 COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1998
Revenues. Revenues for the three months ended April 30, 1999 were $8.8
million compared with $7.8 million for the three months ended April 30, 1998, an
increase of $1.0 million or 12.8%. This increase was attributable to increased
volumes of LPG sold during the three months ended April 30, 1999, resulting in
an increase in sales of $2.1 million, partially offset by a decrease in average
sales price for LPG during the three months ended April 30, 1999 of $804,976.
Cost of sales. Cost of sales for the three months ended April 30, 1999 was
$8.0 million compared with $7.2 million for the three months ended April 30,
1998, an increase of $693,040 or 9.6%. This increase was attributable to the
increase in volume of LPG sold during the three months ended April 30, 1999,
resulting in an increase in cost of goods sold of $1.7 million, partially offset
by the decrease in average purchase price for LPG purchased during the three
months ended April 30, 1999 of $850,307.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $563,829 for the three months ended April 30, 1999
compared with $563,682 for the three months ended April 30, 1998, an increase of
$147 or 0.0%.
Other income and expenses, net. Other income (expense), net was ($133,509)
for the three months ended April 30, 1999 compared with ($41,059) for the three
months ended April 30, 1998. The increase in other income (expense), net,
during the three months ended April 30, 1999 was due primarily to increased
interest costs and lower interest income on a note from the president of the
Company and a related party which, beginning in fiscal 1999, will be recorded
only when cash is actually received.
Income tax. Due to the availability of net operating loss carryforwards at
July 31, 1998 and 1997 of $8.8 million and $5.3 million, net income for the
three months ended April 30, 1999 did not result in any income tax expense. Due
to the net loss for the three months ended April 30, 1998, there was no income
tax expense. The ability to utilize such net operating loss carryforwards,
which expire in the years 2009 to 2013, may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the Internal
Revenue Code.
20
<PAGE>
NINE MONTHS ENDED APRIL 30, 1999 COMPARED WITH THE NINE MONTHS ENDED APRIL 30,
1998
Revenues. Revenues for the nine months ended April 30, 1999 were $23.7
million compared with $24.2 million for the nine months ended April 30, 1998, a
decrease of $524,362 or 2.2%. This decrease was attributable to a decrease in
average sales price for LPG during the nine months ended April 30, 1999 of $5.7
million, partially offset by increased volumes of LPG sold during the nine
months ended April 30, 1999, resulting in an increase in sales of $5.5 million.
Cost of sales. Cost of sales for the nine months ended April 30, 1999 was
$21.3 million compared with $22.3 million for the nine months ended April 30,
1998, a decrease of $1.0 million or 4.7%. This decrease was attributable to a
decrease in average purchase price for LPG purchased during the nine months
ended April 30, 1999 of $5.6 million, offset by the increase in volume of LPG
sold during the nine months ended April 30, 1999, resulting in an increase in
cost of goods sold of $4.6 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.7 million for the nine months ended April 30,
1999 compared with $1.5 million for the nine months ended April 30, 1998, an
increase of $241,105 or 16.0%. This increase was primarily attributable to
payroll, legal and other costs.
Other income and expenses, net. Other income (expense), net was $561,828
for the nine months ended April 30, 1999 compared with ($83,808) for the nine
months ended April 30, 1998. The increase in other income (expense), net,
during the nine months ended April 30, 1999 was due primarily to the award from
litigation of $987,114, partially offset by increased interest costs and lower
interest income on a note from the president of the Company and a related party
which, beginning in fiscal 1999, will be recorded only when cash is actually
received.
Income tax. Due to the availability of net operating loss carryforwards
($8.8 million and $5.3 million at July 31, 1998 and 1997), net income for the
nine months ended April 30, 1999 and 1998 did not result in any income tax
expense. The ability to utilize such net operating loss carryforwards, which
expire in the years 2009 to 2013, may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the Internal
Revenue Code.
Historically, the Company has received the majority of its total annual
revenues during the months of October through March. Such pattern is
attributable to the seasonal demand for LPG, which is typically greatest during
the winter months of the second and third quarters of the Company's fiscal year.
The Company's quarterly earnings may vary considerably due to the impact of such
seasonality.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations and has a deficit in working capital and is
delinquent under certain loan and lease agreements. In addition, the Company is
involved in litigation, the outcome of which cannot be determined at the present
time. 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.
21
<PAGE>
The following summary table reflects comparative cash flows for the nine
months ended April 30, 1999 and 1998. All information is in thousands.
<TABLE>
<CAPTION>
Nine months Ended
----------------------------
April 30, April 30,
1999 1998
------------ --------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 743,387 $ ( 723,409)
Net cash (used in) investing
activities . . . . . . . . . . . . . . . . . . . . ( 337,475) ( 1,117,798)
Net cash provided by financing activities . . . . . 112,379 2,078,728
------------ --------------
Net increase in cash. . . . . . . . . . . . . . . . $ 518,291 $ 237,521
============ ==============
</TABLE>
The PMI Sales Agreement is effective for the period from October 1, 1998
through September 30, 1999 and provides for the purchase by PMI of minimum
monthly volumes of LPG aggregating a minimum annual volume of 69.0 million
gallons, similar to minimum volume requirements under the previous sales
agreement with PMI effective during the period from October 1, 1997 to September
30, 1998. During October 1998, the Company entered into a monthly supply
agreement with Exxon pursuant to which Exxon agreed to supply minimum volumes of
LPG to the Company. Effective November 1, 1998, the Company entered into a
supply agreement with Exxon to purchase minimum monthly volumes of LPG through
September 1999. The Company believes it has access to an adequate supply of LPG
from Exxon and other suppliers to satisfy the requirements of PMI under the PMI
Sales Agreement. In determining whether any supplier will be utilized, the
Company will consider the applicable prices charged as well as any additional
fees that may be required to be paid under the Pipeline Lease. Beginning
October 1998, the Company anticipates 10% - 15% lower gross margins on its LPG
sales as a result of increased LPG costs compared with the previous agreements.
Pipeline Lease. The Pipeline Lease currently expires on March 31, 2013,
pursuant to an amendment entered into between the Company and Seadrift on May
21, 1997, effective on April 1, 1998 (the "Pipeline Lease Amendment"). The
Pipeline Lease Amendment provides, among other things, for additional storage
access and inter-connection with another pipeline controlled by Seadrift,
thereby providing greater access to and from the Pipeline. Pursuant to the
Pipeline Lease Amendment, the Company's fixed annual fee associated with the use
of the Pipeline was increased by $350,000. In addition, the Pipeline Lease
Amendment provides for variable rental increases based on monthly volumes
purchased and flowing into the Pipeline. Beginning February 1, 1999, Seadrift
began invoicing the Company as prescribed under the Pipeline Lease Amendment.
The Company believes the extension of the Pipeline Lease gives the Company
increased flexibility in negotiating sales and supply agreements with its
customers and suppliers. During November 1998, the Company issued a promissory
note to Seadrift for $261,206, representing all outstanding rental obligations
owed to Seadrift through November 1998. The promissory note was payable in six
installments beginning November 25, 1998 and ending February 3, 1999. Interest
on the promissory note was 10% per annum. The Company made all payments
required under the promissory note.
Credit Arrangements. In connection with the PMI Sales Agreement, invoicing
is to occur weekly. From November 1996 to early November 1997, the Company and
PMI made an arrangement under which PMI provided financing on the Company's
behalf under the terms of the Company's supply agreement with Exxon, the
Company's main supplier. As a result of this arrangement, invoicing occurred on
a monthly, rather than a weekly basis.
22
<PAGE>
On October 22, 1997, the Company entered into a $6.0 million credit
facility with RZB Finance L.L.C. (RZB) for demand loans and standby letters of
credit (RZB Credit Facility) to finance the Company's purchase of LPG. Under
the RZB Credit Facility, the Company pays a fee with respect to each letter of
credit thereunder in an amount equal to the greater of (i) $500, (ii) 1.5% of
the maximum face amount of such letter of credit, or (iii) such higher amount as
may be agreed to between the Company and RZB. Any amounts outstanding under the
RZB Credit Facility shall accrue interest at a rate equal to the rate announced
by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant to the RZB
Credit Facility, RZB has sole and absolute discretion to terminate the RZB
Credit Facility and to make any loan or issue any letter of credit thereunder.
RZB also has the right to demand payment of any and all amounts outstanding
under the RZB Credit Facility at any time. In connection with the RZB Credit
Facility, the Company granted a mortgage, security interest and assignment in
any and all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the lease
with the Brownsville Navigation District of Cameron County for the land on which
the Company's Brownsville Terminal Facility is located, the Pipeline Lease, and
in connection therewith agreed to enter into leasehold deeds of trust, security
agreements, financing statements and assignments of rent, in forms satisfactory
to RZB. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any nature on
any of its properties or assets, except in favor of RZB, without the consent of
RZB. The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect to
the RZB Credit Facility. Upon establishment of the RZB Credit Facility,
beginning November 11, 1997, PMI no longer provided any financing on behalf of
the Company, and the Company began invoicing PMI on a weekly basis.
Effective April 22, 1998, the aggregate amount available under the RZB
Credit Facility was increased to $7.0 million. The Company believes that based
on current market prices of LPG and LPG volume requirements under the PMI Sales
Agreement, the RZB Credit Facility is adequate. In January 1999, the fee
charged for letters of credit issued under the RZB Credit Facility was increased
to 2.5%.
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 April 30, 1999, letters of credit established under the RZB
Credit Facility in favor of Exxon and PG&E for purchases of LPG totaled $6.0
million and $335,000 of which $1.9 million and $341,811 were being used to
secure unpaid purchases from Exxon and PG&E as of April 30, 1999. In connection
with these purchases, as of April 30, 1999, the Company had unpaid invoices due
from PMI totaling $1.8 million and cash balances maintained in the RZB Credit
Facility collateral account of $717,816.
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 $0.9 million of the
promissory notes for 90,000 shares of the Company's Senior Preferred Stock (the
Senior Preferred Stock) at a purchase price of $10.00 per share. The Senior
Preferred Stock is non-voting and dividends are payable at a rate of 12%
23
<PAGE>
annually, payable in cash or in kind, semi-annually. The Senior Preferred Stock
may be converted in whole or in part at any time at a conversion ratio of one
share of Senior Preferred Stock for 4.0 shares of common stock of the Company.
In connection with the exchange, the holder of the Senior Preferred Stock
received 50,000 shares of common stock of the Company and may receive an
additional 50,000 shares of common stock of the Company, if the Senior Preferred
Stock is not redeemed by the Company prior to September 3, 1999. The Company
has granted one demand registration right with respect to any common stock of
the Company which may be acquired and/or received by the holder of the Senior
Preferred Stock in connection with the transaction. The Company and the holder
of the Senior Preferred Stock have agreed to share the costs of the
registration.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 75,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 12, 2000
for an amount of $250,000. Net proceeds from the sale were used for working
capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common stock of
the Company and warrants to purchase 300,000 shares of common stock with an
exercise price of $1.75 per warrant and an expiration date of December 13, 2003
for an amount of $500,000. Net proceeds from the sale 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 and the cancellation of any further obligation to
pay any future royalties in connection with Company's purchase of certain CNG
assets from Wilson Technologies Inc., a wholly owned subsidiary of ZHI.
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 $26,000 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 60,106 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.
During May 1999, the Company entered into separate settlement
agreements with a legal firm and a supplier (the "Creditors") in connection with
prior services performed for the Company. Under the terms of the settlements,
the Company has agreed to make specified payments totaling $550,000 to the
Creditors. At the time of the settlements, the Company had approximately
$614,000 of accrued liabilities recorded in connection with amounts owed to the
Creditors. 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.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville. On June
10, 1999, IBC-Brownsville was denied its petition for review by the Supreme
Count of Texas. As of April 30, 1999, the net amount of the award is
approximately $3.7 million, which is comprised of the sum of (i) the original
24
<PAGE>
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). The remaining proceeds available from the
Judgment have been assigned to the promissory note holders to the extent of any
amounts then owing under the promissory notes. See notes G, I and L to the
Consolidated Financial Statements.
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection of
the Judgment, the Company's ability to obtain additional financing and to raise
additional equity capital, and the success of the Company's future operations.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base, (iv)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines and (vi) raise additional debt and/or
equity capital. See note J to the Consolidated Financial Statements.
Year 2000 Date Conversion. Management has determined that the consequences
of its Year 2000 issues will not have a material effect on the Company's
business, results of operations, or financial condition.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per Share, and
requires the calculation and dual presentation of basic and diluted earnings per
share (EPS), replacing the measures of primary and fully-diluted EPS as reported
under Opinion No. 15. SFAS 128 became effective for financial statements issued
for periods ending after December 15, 1997; earlier application was not
permitted. Accordingly, EPS for the periods presented in the accompanying
consolidated statements of operations are calculated under the guidance of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997.
25
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note I to the unaudited Consolidated Financial Statements and Note O to the
Company's Annual Report on Form 10-K for the year ended July 31, 1998.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Exhibits are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT NO.
- - -----------
<C> <S>
10.71 LPG Mix Purchase Contract dated September 28, 1998 between P.M.I. Trading Limited and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1998
filed on November 13, 1998, SEC File No. 000-24394).
10.72 LPG 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).
10.73 Rollover and Assignment Agreement dated December 1, 1998 among Castle Energy Corporation, Clint Norton,
Southwest Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(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).
10.74 Registration Rights Agreement dated December 1, 1998 among Castle Energy Corporation, Clint Norton,
Southwest Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(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).
10.75 Collateral Agreement dated December 1, 1998 among Castle Energy Corporation, Clint Norton, Southwest
Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company. (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).
26
<PAGE>
10.76 Assignment of Judgment Agreement dated December 1, 1998 among Castle Energy Corporation, Clint Norton,
Southwest Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(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).
10.77 Amended 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).
10.78 Common 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).
10.79 Amended 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).
10.80 Common 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).
10.81 Amended 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).
10.82 Common 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).
10.83 Amended 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).
10.84 Common 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).
10.85 Amended 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).
10.86 Common Stock Purchase Warrant dated December 1, 1998 issued to Donaldson Luftkin Jenrette Securities
Corporation Custodian SEP FBO James F. Meara IRA and the Company. (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).
27
<PAGE>
10.87 Amended 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).
10.88 Common 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).
10.89 Purchase 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).
10.90 Registration 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).
10.91 Common 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).
10.92 Purchase 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).
10.93 Registration 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).
10.94 Common 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).
10.95 Second 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).
</TABLE>
The following material contracts are filed as part of this report:
<TABLE>
<CAPTION>
<C> <S>
10.96 Purchase Agreement dated March 18, 1999 between Van Moer Santerre & Company and the Company.
10.97 Registration Rights Agreement dated March 18, 1999 between Van Moer Santerre & Company and the
Company.
10.98 Common Stock Purchase Warrant dated March 18, 1999 issued to Van Moer Santerre & Company by the
Company.
10.99 Purchase Agreement dated March 19, 1999 between Steve Payne and the Company.
10.100 Registration Rights Agreement dated March 19, 1999 between Steve Payne and the Company.
10.101 Common Stock Purchase Warrant dated March 19, 1999 issued to Steve Payne by the Company.
10.102 Purchase Agreement dated March 19,1999 between Igor Kent and the Company.
28
<PAGE>
10.103 Registration Rights Agreement dated March 19,1999 between Igor Kent and the Company.
10.104 Common Stock Purchase Warrant dated March 19,1999 issued to Igor Kent by the Company.
27.1 Financial Data Schedule. (Filed herewith.)
</TABLE>
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.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
June 14, 1999 By: /s/ Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
30
<PAGE>
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of March 18, 1999 by and
between Van Moer Santerre and Company, a Luxembourg company (the "Purchaser")
and Penn Octane Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) 120,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $1.25 per share, and (ii) a warrant,
exercisable until March 18, 2002 at $2.25 per share of Common Stock (subject to
adjustment), to purchase 60,000 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 Fifty Thousand ($150,000.00) Dollars.
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on March 18, 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.
<PAGE>
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.
(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.
- 5 -
<PAGE>
(iv) In no event shall any sale, assignment, pledge or
transfer of the Shares, the Warrant or such underlying Common Stock by the
Purchaser to a transferee give rise to rights of any such transferee under the
Registration Rights Agreement.
6. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------------
obligations of the Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to the
satisfaction at or prior to the Closing of the following conditions precedent:
(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall be
true and correct on and as of the Closing in all respects with the same effect
as though representations and warranties had been made on and as of the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from an executive officer of the other party to the effect that its
representations and warranties are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Fee.
---
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.
- 6 -
<PAGE>
9. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the Purchaser without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: John F. Watkins, Esq.
- 7 -
<PAGE>
(b) If to the Purchaser, at the following address:
Van Moer, Santerre & Company
Blvd. Anspach 111
1000 Brussels
Belgium
Attn: Phillippe de Cock
with a copy to:
______________________
______________________
______________________
______________________
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be binding
---------------
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 18 day of March 1999.
VAN MOER SANTERRE & COMPANY
By:
Name: Phillippe De Cock
Title:
PENN OCTANE CORPORATION
By:
Name: Jerome B. Richter
Title: President and Chief Executive Officer
- 9 -
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
the Closing Date (as defined herein) by and among Penn Octane Corporation, a
Delaware corporation (the "Company"), and Van Moer Santerre & Company, a
Luxembourg company ("Purchaser").
This Agreement is entered into pursuant to the Purchase Agreement between
the Company and Purchaser (the "Purchase Agreement"). In order to induce the
Purchaser to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution of
this Agreement by the Company is a condition to the closing under the Purchase
Agreement.
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have the respective
meanings set forth in the Purchase Agreement. As used in this Agreement, the
following terms shall have the following meanings:
Closing Date: The date on which the Closing occurs pursuant to the
--------------
Purchase Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
Losses: The term "Losses" shall have the meaning set forth in Section 6
------
hereof.
Prospectus: The prospectus included in any Registration Statement
-----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
Registrable Securities: The Shares and all shares of Common Stock issuable
-----------------------
upon exercise of the Warrants, plus any Common Stock issued or issuable to the
Purchaser in respect of the Shares or Warrant Shares, pursuant to any stock
split, stock dividend, recapitalization, or similar event. The Warrant is not a
Registrable Security hereunder. As to any Registrable Securities, such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of pursuant to such effective registration statement, (ii) such securities shall
have been distributed pursuant to Rule 144 or any similar provision then in
force, under the Securities Act, (iii) such securities shall have been otherwise
transferred, new certificates or other evidences of ownership for them not
bearing a legend restricting further transfer and not subject to any stop
transfer order or other restrictions on transfer shall have been delivered by
the Company and subsequent disposition of such securities shall not require
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.
<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
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.
2
<PAGE>
(b) In the event the Company does not participate in Piggy-Back
registration, all Registrable Securities will be registered by September 19,
1999.
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)).
3
<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.
4
<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
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.
5
<PAGE>
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any 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.
6
<PAGE>
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).
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.
7
<PAGE>
(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.
IN WITNESS WHEREOF, the parties have executed this agreement as of March
18, 1999.
PENN OCTANE CORPORATION
By:
Jerome B. Richter
Chairman, President and Chief Executive Officer
VAN MOER SANTERRE & COMPANY
By: ____________________________________
Name:
Title:
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 March 18, 2002
Warrant to Purchase 60,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
VAN MOER SANTERRE AND COMPANY
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on March 18, 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),
60,000 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $2.25 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."
1
<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 $3.25 for five consecutive trading days,
upon not less than ten (10) days' notice in writing to the Holder, repurchase
all or any portion of this Warrant at a purchase price equal to $.10 per share
of Common Stock covered hereby, such purchase price to be proportionally
adjusted each time the Exercise Price is adjusted pursuant to Section 6 hereof.
During such 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: /S/ Jerome B. Richter
------------------------------------------
Jerome B. Richter
President and Chief Executive Officer
Dated: March 18, 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 March 19, 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) 60,606 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $1.65 per share, and (ii) a warrant,
exercisable until March 19, 2002 at $2.59 per share of Common Stock (subject to
adjustment), to purchase 30,303 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.
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on March 19, 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.
<PAGE>
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.
(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.
- 5 -
<PAGE>
(iv) In no event shall any sale, assignment, pledge or
transfer of the Shares, the Warrant or such underlying Common Stock by the
Purchaser to a transferee give rise to rights of any such transferee under the
Registration Rights Agreement.
6. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------------
obligations of the Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to the
satisfaction at or prior to the Closing of the following conditions precedent:
(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall be
true and correct on and as of the Closing in all respects with the same effect
as though representations and warranties had been made on and as of the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from an executive officer of the other party to the effect that its
representations and warranties are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Fee. 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.
- 6 -
<PAGE>
9. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the Purchaser without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 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
- 7 -
<PAGE>
(b) If to the Purchaser, at the following address:
Steve Payne
1707 Sunset Drive
Carbondale, IL 62901
with a copy to:
______________________
______________________
______________________
______________________
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be binding
---------------
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 19 day of March 1999.
STEVE PAYNE
By: /s/ Steve Payne
------------------------------------------
Name: Steve Payne
Title:
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------------------------
Name: Jerome B. Richter
Title: President and Chief Executive Officer
- 9 -
<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
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
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.
2
<PAGE>
(b) In the event the Company does not participate in Piggy-Back
registration, all Registrable Securities will be registered by September 19,
1999.
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)).
3
<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.
4
<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
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.
5
<PAGE>
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any 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.
6
<PAGE>
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).
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.
7
<PAGE>
(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.
IN WITNESS WHEREOF, the parties have executed this agreement as of March
19, 1999.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
----------------------------------------------------
Jerome B. Richter
Chairman, President and Chief Executive Officer
Steve Payne
By: ____________________________________
Name:
Title:
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 March 19, 2002
Warrant to Purchase 30,303 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 March 19, 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),
30,303 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $2.59 per share, subject to adjustment as to
number of shares and purchase price as set forth in Section 6 below. The
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
For purposes of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or in Redwood City, California, are authorized by law or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein called the "Warrant Stock."
1
<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 $3.50 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: /S/ Jerome B. Richter
------------------------------------------
Jerome B. Richter
President and Chief Executive Officer
Dated: March 19, 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 March 19, 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) 146,667 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock") for $1.50 per share, and (ii) a warrant,
exercisable until March 19, 2002 at $2.42 per share of Common Stock (subject to
adjustment), to purchase 73,333 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 Twenty Thousand ($220,000.00) Dollars.
2. The Closing. The closing (the "Closing") of the purchase and sale
------------
of the Securities shall take place on March 19, 1999 at 12:00 noon. 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.
<PAGE>
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.
(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.
- 5 -
<PAGE>
(iv) In no event shall any sale, assignment, pledge or
transfer of the Shares, the Warrant or such underlying Common Stock by the
Purchaser to a transferee give rise to rights of any such transferee under the
Registration Rights Agreement.
6. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------------
obligations of the Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to the
satisfaction at or prior to the Closing of the following conditions precedent:
(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall be
true and correct on and as of the Closing in all respects with the same effect
as though representations and warranties had been made on and as of the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from an executive officer of the other party to the effect that its
representations and warranties are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Fee. None.
---
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.
- 6 -
<PAGE>
9. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the Purchaser without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
10. Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with the law of the State of New York, regardless of the law that
might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
-----------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
13. Notices. All notices and other communications provided for herein
-------
shall be in writing and shall be deemed to have been duly given if delivered
personally or by facsimile (with proof of receipt) or sent by registered or
certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Law Offices of Kevin W. Finck
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111
Attn: Kevin W. Finck, Esq.
- 7 -
<PAGE>
(b) If to the Purchaser, at the following address:
Igor Kent
578 35th Street
Manhattan Beach, CA 90266
with a copy to:
______________________
______________________
______________________
______________________
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be binding
---------------
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 19 day of March 1999.
IGOR KENT
By: /S/ Igor Kent
------------------------------------------
Name: Igor Kent
Title:
PENN OCTANE CORPORATION
By: /S/ Jerome B. Richter
------------------------------------------
Name: Jerome B. Richter
Title: President and Chief Executive Officer
- 9 -
<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
- 1 -
<PAGE>
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
- 2 -
<PAGE>
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 September 19, 1999.
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.
- 3 -
<PAGE>
(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)).
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.
- 4 -
<PAGE>
(b) The foregoing provisions shall not apply to any holder of
Registrable Securities if such holder is prevented by applicable statute or
regulation from entering into any such agreement; provided, however, that any
-----------------
such holder shall undertake in its request to participate in any such
underwritten offering not to effect any public sale or distribution of the class
of Registrable Securities covered by such Registration Statement (except as part
of such underwritten offering) during such period unless it has provided five
(5) business days prior written notice of such sale or distribution to the
managing underwriter or underwriters.
6. Indemnification
---------------
(a) Indemnification by Company. The Company shall indemnify and hold
----------------------------
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act), and the officers, directors, agents or
employees of any such controlling person, from and against all losses, claims,
damages, liabilities, costs (including, without limitation, all reasonable
attorneys' fees) and expenses (collectively, "Losses"), arising out of or based
upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus, or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made (in the case of any Prospectus) not misleading, except insofar as the same
are based solely upon information furnished to the Company by such holder for
use therein; provided, however, that the Company shall not be liable in any such
-----------------
case to the extent that any such Loss arises out of or is based upon an untrue
statement or omission made in any preliminary prospectus or Prospectus if (i)
such holder failed to send or deliver a copy of the Prospectus or Prospectus
supplement with or prior to the delivery of written confirmation of the sale of
Registrable Securities and (ii) the Prospectus or Prospectus supplement would
have corrected such untrue statement or omission.
(b) Indemnification by Holder of Registrable Securities. In connection
---------------------------------------------------
with any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities shall furnish to the
Company in writing such information as the Company may reasonably request for
use in connection with any Registration Statement or Prospectus. Each holder of
Registrable Securities shall indemnify and hold harmless, to the full extent
permitted by law, the Company, and its officers, directors, agents and
employees, each person who controls the Company (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents or employees of any such controlling person, from and against
all Losses arising out of or based upon any untrue statement of a material fact
contained in any Registration Statement, Prospectus or preliminary prospectus,
or arising out of or based upon any omission of a material fact required to be
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.
- 5 -
<PAGE>
(c) Conduct of Indemnification Proceedings. If any action or
------------------------------------------
proceeding (including any governmental investigation or inquiry) shall be
brought or any claim shall be asserted against any person entitled to indemnity
hereunder (an "indemnified party"), such indemnified party shall promptly notify
the party from which such indemnity is sought (the "indemnifying party") in
writing, and the indemnifying party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses incurred in connection with the defense
thereof. All such fees and expenses (including any fees and expenses incurred
in connection with investigating or preparing to defend such action or
proceeding) incurred by the indemnified party, shall be paid to the indemnified
party, as incurred, within 20 days of written notice thereof to the indemnifying
party; provided, however, that if, in accordance with this Section 6, the
------------------
indemnifying party is not liable to the indemnified party, such fees and
expenses shall be returned promptly to the indemnifying party. Any such
indemnified party shall have the right to employ separate counsel in any such
action, claim or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be the expense of such indemnified party
unless (a) the indemnifying party has agreed to pay such fees and expenses, (b)
the indemnifying party shall have failed promptly to assume the defense of such
action, claim or proceeding and to employ counsel reasonably satisfactory to the
indemnified party in any such action, claim or proceeding, or (c) the named
parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion of
counsel for such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the release
of such indemnified party from all liability in respect to such claim or
litigation without the written consent (which consent will not be unreasonably
withheld) of the indemnified party. No indemnified party shall consent to entry
of any judgment or enter into any set-tlement without the written consent (which
consent will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
- 6 -
<PAGE>
(d) Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of any Losses, then each applicable indemnifying party in lieu of indemnifying
such indemnified party hereunder shall contribute to the amount paid or payable
by such indemnified party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of a material fact or omission of a material
fact, has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 6(c), any legal or other fees or expenses reasonably incurred
by such party in connection with any action, suit, claim, investigation or
proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any 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.
- 7 -
<PAGE>
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).
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.
- 8 -
<PAGE>
(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 March
19, 1999.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
----------------------------------------------------
Jerome B. Richter
Chairman, President and Chief Executive 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 March 19, 2002
Warrant to Purchase 73,333 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 March 19, 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),
73,333 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock") at an exercise price of $2.42 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 $3.50 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: /s/ Jerome B. Richter
------------------------------------------
Jerome B. Richter
President and Chief Executive Officer
Dated: March 19, 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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Penn Octane
Corporation's Quarterly Report on Form 10-Q for the quarter period ended April
30, 1999 and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 675804
<SECURITIES> 0
<RECEIVABLES> 2174292
<ALLOWANCES> 418796
<INVENTORY> 483797
<CURRENT-ASSETS> 3429682
<PP&E> 4820839
<DEPRECIATION> 1659398
<TOTAL-ASSETS> 8471964
<CURRENT-LIABILITIES> 5447829
<BONDS> 0
<COMMON> 111889
0
900
<OTHER-SE> 2911346
<TOTAL-LIABILITY-AND-EQUITY> 8471964
<SALES> 23672837
<TOTAL-REVENUES> 23672837
<CGS> 21256379
<TOTAL-COSTS> 21256379
<OTHER-EXPENSES> 1745531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 428025
<INCOME-PRETAX> 1232755
<INCOME-TAX> 0
<INCOME-CONTINUING> 1232755
<DISCONTINUED> (275488)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 957267
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
