Control #:
NEITHER THIS PROMISSORY NOTE NOR ANY OF THE RIGHTS OR
OBLIGATIONS EVIDENCED HEREBY HAVE BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY STATE (THE "STATE
LAWS"). NEITHER THIS PROMISSORY NOTE NOR ANY OF THE
RIGHTS OR OBLIGATIONS EVIDENCED HEREBY MAY BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF, IN WHOLE
OR IN PART, IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION OR THE AVAILABILITY OF AN APPLICABLE
EXEMPTION FROM THE REGISTRATION AND QUALIFICATION
REQUIREMENTS OF SUCH ACT AND STATE LAWS EVIDENCED BY AN
OPINION OF LEGAL COUNSEL, WHICH OPINION AND LEGAL COUNSEL
ARE SATISFACTORY TO THE BORROWER.
SERIES B PROMISSORY NOTE
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Palm Desert, California
1. General
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FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to, a __________________________ (the "Holder"),
at the Holder's address set forth in Section 14 of the Purchase Agreement, dated
as of even date herewith (the "Agreement"), between the Borrower and the Holder,
pursuant to which this Promissory Note (the "Series B Note") is first being
issued, or at such other address as the Holder may designate to the Borrower in
writing for such purpose pursuant to Section 14 of the Agreement at least three
Business Days (hereinafter defined) prior to the date fixed for such payment,
the entire principal sum of ($), together with interest thereon, on the earlier
of (i) December 15, 2001, (ii) a date determined by the Borrower within ten (10)
Business Days after the closing of any Financing (as defined in Clause (i)(a) of
Recital A to and Section 10 of the Agreement) in which the net proceeds to the
Borrower equal or exceed the aggregate (the "Aggregate Amount") of the then
unpaid principal of and the then accrued and unpaid interest on the (A) Series B
Notes (as defined in the Agreement) held by the Investors (as defined in the
Agreement), (B) Series A Notes (as defined in the Agreement), and (C) Additional
Debt (as defined in the Agreement), or (iii) the occurrence of an Event of
Default (hereinafter defined) (collectively, the "Maturity Date"), at which time
all principal and any accrued and unpaid interest thereon shall be due and
owing.
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In the event of the closing of a Financing in which the net proceeds to the
Company do not equal or exceed the Aggregate Amount, on a date determined by the
Borrower within ten (10) Business Days after such closing, the Borrower shall
apply such net proceeds to prepay the then unpaid principal of and the then
accrued and unpaid interest on the (i) Series B Notes held by the Investors,
(ii) Series A Notes, and (iii) Additional Debt, pro rata in accordance with the
respective then unpaid principal amounts owed to each.
This Series B Note shall accrue interest on unpaid principal from the date
hereof at the rate of thirteen and one-half percent (13.5%) per annum, subject
to adjustment as set forth herein and payable on March 31, 2001, June 15, 2001,
September 15, 2001 and December 15, 2001 (or the Maturity Date, if earlier).
Payment of this Note may be enforced by suit or other process of law. This
Series B Note may be prepaid in whole or in part at any time prior to maturity
without premium or penalty.
All payments hereunder shall be payable in lawful money of the United
States and shall be applied first against accrued and unpaid interest and then
against unpaid principal. Any payments hereunder which otherwise would be due
on a day which is not a Business Day shall instead be made on the next
succeeding day which is a Business Day. For purposes of this Series B Note, the
term "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 Palm Desert,
California, are authorized by law or regulation to close.
If the entire security interest referenced in Section 2.3 hereof is not
perfected with the priority described in Schedule I attached on or before March
15, 2001, the interest rate hereunder shall be increased by 3% per annum for the
period from and including March 15, 2001 to and including the date on which such
security interest is so perfected. For purposes of this Section 1, a security
interest will be deemed perfected when either (a) PMG Capital Corp. ("PMG"), as
collateral agent, acting reasonably, is satisfied in its discretion and based on
the advice of its counsel that such security interest has been validly perfected
in accordance with all applicable laws with the priority specified in Schedule I
attached hereto, or (b) the Borrower delivers to PMG, as collateral agent, a
legal opinion, in form and substance satisfactory to PMG and upon which PMG and
each holder of any Secured Obligations (as defined in Section 2.3 hereof) shall
be permitted to rely, that the security interest has been validly perfected in
accordance with all applicable laws with the priority specified in Schedule I
attached hereto.
If the registration statement (the "Registration Statement") contemplated
by Section 3(a) of the Registration Rights Agreement (as defined in the
Agreement) is not declared effective by the Securities and Exchange Commission
(the "SEC") by March 31, 2001 or, if the Borrower is not then eligible to use
Form S-3 for purposes of such Registration Statement, by April 30, 2001 (such
date being hereinafter referred to as the "Required Registration Date"), then
the interest rate hereunder shall be increased by 4% per annum for the period
from and including the Required Registration Date to and including the date
immediately preceding the date on which the Registration Statement is declared
effective by the SEC. The interest rate hereunder shall also be increased by 4%
per annum if the Registration Statement, having been declared effective by the
SEC, does not remain effective during any period during which the Borrower is
required to use its reasonable best efforts to keep such Registration Statement
effective pursuant to the Registration Rights Agreement, with such increase
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being applicable from and including any date on which the Registration Statement
is no longer effective and the Borrower is obligated under the Registration
Rights Agreement to use its reasonable best efforts to keep it effective to and
including the earlier of the date on which the Registration Statement is
restored to effective status or the date on which the Borrower's obligation to
use its reasonable best efforts to keep the Registration Statement effective
expires or is suspended.
2. Remedies
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2.1 Events of Default Defined. The Borrower shall be in default
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hereunder upon the occurrence of any of the following events of default ("Events
of Default"): (i) the failure by the Borrower to make any payment when due
hereunder and such failure shall have continued for a period of five (5) days
after delivery by the Holder to the Borrower of written notice of such failure
pursuant to Section 14 of the Agreement; (ii) the commencement by the Borrower
of a voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Borrower a
bankrupt (or the appointment of a receiver or trustee of the Borrower upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit, which appointment is not terminated within sixty (60) days
after the date of such appointment); (iii) the filing of a petition for
reorganization, liquidation or arrangement against the Borrower under the
Federal bankruptcy laws and such petition shall not have been dismissed within
sixty (60) days after it was filed; (iv) the making of a general assignment for
the benefit of its creditors by the Borrower; (v) the existence of any final,
non-appealable judgment on any of the Series B Notes held by the Investors on
account of the nonpayment thereof by the Borrower; (vi) the breach of any
material representation, warranty or covenant (other than as described in the
preceding clauses (i) through (v)) of the Borrower in the security agreement
contemplated by Section 2.3 below if the Borrower fails to cure such breach
within a period of fifteen (15) days following the delivery by the Holder to the
Borrower of written notice of such breach pursuant to Section 14 of the
Agreement; or (vii) the breach of any material representation, warranty or
covenant of the Guarantor (as hereinafter defined) in the Guaranty or Pledge
Agreement (as such terms are hereinafter defined) contemplated by Section 2.3
below if the Guarantor fails to cure such breach within a period of fifteen (15)
days following the delivery by the Holder to the Guarantor of written notice of
such breach pursuant to Section 13 of the Pledge Agreement.
2.2 Enforcement Costs. If any payment owing under this Series B Note
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is not paid when due, whether at maturity or by acceleration or otherwise, the
Borrower agrees to pay all reasonable costs of collection and such costs shall
include, without limitation, all reasonable costs, attorneys' fees and expenses
incurred by the Holder in connection with any insolvency, bankruptcy,
reorganization, arrangement or similar proceedings involving the Borrower, which
in any way affects the exercise by the Holder of the Holder's rights and
remedies under this Series B Note.
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2.3 Security.
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a. The payment obligations of the Borrower hereunder and under the
Series B Notes held by the Investors, the Series A Notes and the Additional Debt
(collectively, the "Secured Obligations") are secured by a Guaranty dated
January ___, 2001 (the "Guaranty") of Jerome B. Richter (the "Guarantor"), which
Guaranty is with recourse only to certain shares of the Borrower's Common Stock
owned by the Guarantor and pledged to secure the Guarantor's obligations under
the Guaranty pursuant to the terms and provisions of a Pledge Agreement (the
"Pledge Agreement") dated as of January ___, 2001 between the Guarantor and PMG
as collateral agent for the holders of the Secured Obligations (the "Secured
Noteholders").
b. The Borrower shall grant to the Secured Noteholders the
security interest described in Schedule I attached hereto.
2.4 Remedies Not Waived. No delay on the part of the Holder in the
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exercise of any right or remedy shall operate as a waiver thereto, and no single
or partial exercise by Holder of any right or remedy shall preclude the further
exercise thereof or the exercise of any other right or remedy.
2.5 Other. Except to the extent otherwise contemplated hereby, the
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Borrower hereby waives presentment, demand, protest, notice of protest, dishonor
and non-payment of this Series B Note and all notices of every kind and agrees
that its liability hereunder shall be unconditional.
3. Assignability; Binding Effect. The provisions of Section 9 and 15
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of the Agreement are incorporated herein by this reference and made applicable
to this Series B Note.
4. Severability. Any provision in this Series B Note that is held to
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be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as
to that jurisdiction, be ineffective, unenforceable, void or invalid without
affecting the remaining provisions in any other jurisdiction, and to this end
the provisions of this Series B Note are declared to be severable.
5. Replacement of Series B Note. Upon receipt by the Company of
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evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Series B Note and (in case of loss, theft or destruction) of
an indemnity bond reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Series B Note, if mutilated, the Company will make and
deliver to the Holder a new Series B Note of like tenor in lieu of this Series B
Note.
6. Certain Restrictive Covenants. For so long as this Series B Note is
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outstanding, the Borrower covenants and agrees that the Borrower will not pay
(i) cash management fees or cash bonuses to its officers or directors other than
cash management fees or cash bonuses which are paid in accordance with past
practices of the Borrower or are provided for in existing employment or other
agreements or are customary for other companies in the Borrower's industry or
are customary for persons having responsibilities similar to those in respect of
which such cash management fees or cash bonuses are paid; or (ii) cash dividends
on its issued and outstanding common stock. The answer to the question of
whether a cash management fee or cash bonus is covered by the restrictions
contained in Section 6(i) of this Series B Note shall be determined solely by
the Borrower, acting in good faith.
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7. Captions. The descriptive headings of the various Sections or parts
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of this Series B Note are for convenience only and shall not affect the meaning
or construction of any of the provisions hereof.
8. Governing Law. This Series B Note shall be governed by, and
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construed in accordance with, the laws of the State of Delaware without giving
effect to such state's conflicts of law provisions. Each of the parties hereto
irrevocably consents to the jurisdiction and venue of the federal and state
courts located in the State of Delaware.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Series B Note to be executed by its duly authorized officer as
of the date first above written.
PENN OCTANE CORPORATION
By:
Ian T. Bothwell, Vice President and
Chief Financial Officer
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Schedule I
Security Interest to be Granted
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1. Security interest in all inventory and accounts receivable of the
Borrower, subordinate only to the prior security interest thereon held by RZB
Finance L.L.C. and Bayerische Hypo-und Vereinsbank Aktiengeselischaft
(collectively, "RZB").
2. Security interest in all other assets of the Borrower located in the
United States of America, including without limitation all of the Borrower's
right, title and interest to: a terminal facility in Brownsville, Texas
(including eleven storage and mixing tanks, four mixed product truck loading
racks, one specification product propane loading rack, two racks capable of
receiving LPG delivered by truck, three railcar loading racks which permit
loading and unloading of LPG by railcar and the rights under a lease for the 31+
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acres of real estate upon which such facility is located) (collectively the
"Brownsville Terminal"); a 132-mile pipeline connecting Exxon Company, USA's
King Ranch Gas Plant in Kleberg County, Texas and Duke Energy's La Gloria Gas
Plant in Jim Wells County, Texas to the Brownsville Terminal; 21 million gallons
of storage capacity in Markham, Texas; and two parallel pipelines running from
the Brownsville Terminal to the United States/Mexico border (the "US Pipelines")
and connecting to the Mexican Pipelines (as hereinafter defined). The foregoing
security interest shall be senior to all other liens on such assets (other than
liens for taxes not yet due and, in the case of the US Pipelines, for a
contractor's lien in an amount not to exceed $1 million), and RZB shall execute
an appropriate subordination and intercreditor agreement in form and substance
reasonably satisfactory to PMG as collateral agent.
3. A security interest in all of the Borrower's right, title and interest
to: a terminal facility in Matamoros, Mexico (including three storage tanks,
ten specification product truck loading racks for LPG product and approximately
35+ acres upon which such facility is located (the "Matamoros Terminal") and two
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parallel pipelines running from the Matamoros Terminal to the Mexico/United
States border (the "Mexican Pipelines") and connecting to the US Pipelines. The
foregoing security interest shall be senior to all other liens on such assets
(other than liens for taxes not yet due), and RZB shall execute an appropriate
subordination and intercreditor agreement in form and substance reasonably
satisfactory to PMG as collateral agent.
4. For purposes of this Schedule I and the Series B Note to which it is
attached, the assets described in the Items 1-2 hereof are referred to as the
"American Assets" and the assets described in Item 3 hereof are referred to as
the "Mexican Assets."
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