January 13, 2004
FirstName LastName
Company
Company1
Address1
Address2
City , State Zip
RE: AMENDMENT - PROMISSORY NOTE ("NOTE") OF PENN OCTANE CORPORATION (THE
"COMPANY") CURRENTLY HELD BY YOU WITH A DUE DATE OF DECEMBER 15, 2003
AND RELATED AGREEMENTS AND INSTRUMENTS
Dear Holder Of The Promissory Notes:
Reference is made to the promissory note(s) which is currently held by you
in connection with one or more of the following transactions with the Company:
i.) The promissory note(s) originally issued by the Company in
connection with the private placement on or around December 17,
1999 (the "Original Notes"), as amended (the "Restructured
Notes"), and/or
ii.) The promissory note(s) originally issued by the Company
contemporaneously with the restructuring of the Original Notes
(the "New Notes").
iii.) The promissory note originally issued in June 2002 for $200,000
and December 2002 for $300,000 (the "Additional Notes").
The Restructured Notes, the New Notes and the Additional Notes are
collectively referred to as the "Promissory Notes" and all of the
underlying agreements pertaining to the Promissory Notes, including the
purchase agreement, the note agreement, the common stock purchase warrant
agreement, the registration rights agreement, and all related amendments,
if any, are collectively referred to as the "Original Documents".
The Promissory Notes, including unpaid interest were due and payable on
December 15, 2003. The Company desires to extend the payment due date on the
Promissory Notes until December 15, 2005 under the following conditions: (i) The
principal amount of the Promissory Notes will be due in one balloon payment on
December 15, 2005, except that the Promissory Notes may be repaid at any time
without penalty in whole or in part at the sole option of the Company, (ii) the
Company will continue to pay interest on the Promissory Notes at a rate of
16.50% per annum, payable quarterly, (iii) The Company will also extend the
expiration date of the warrants currently held by you in connection with the
original issuance of the Promissory Notes to December 15, 2008. In connection
with the New Notes and Additional Notes, whereby the holders of those notes did
not receive any warrants in connection with their investment, the Company will
issue warrants under the
Amendment To Promissory Notes
January 13, 2004
Page 2 of 8
same terms and conditions of the warrants described herein, (iv) the Company
agrees to continue to pay you a fee equal to 1.5% of the principal amount of the
Promissory Notes which remain outstanding, if any, at the close of business on
December 15, 2003, March 15, 2004, June 15, 2004, September 15, 2004, December
15, 2004, March 15, 2005, June 15, 2005, September 15, 2005 and December 15,
2005. In the case of the Additional Notes, the fee will continue to be 2.0%, (v)
the Company will issue additional warrants to the holders of the Promissory
Notes to purchase units in Rio Vista Energy Partners L.P., provided that the
Company successfully completes the Spin-off. The warrants will granted based on
2,500 warrants for each $100,000 of Promissory Notes extended at the time this
Amendment is executed and 2,500 warrants for each $100,000 of Promissory Notes
outstanding on December 16, 2004, if any. The warrants will expire on December
15, 2008 and the exercise price will be based on a formula as described below,
and (vi) the Company will provide the holders of the Promissory Notes with a
letter confirmation from RZB regarding RZB's agreement to refrain from taking
any action against certain assets of the Company until all the Promissory Notes
have been fully repaid and the Company on a good faith basis will provide a
perfected security interest in the US portion of its owned pipelines after the
indebtedness of Cowboy and Tanner have been fully repaid.
The holders of the Promissory Notes are currently aware of the Company's
efforts to complete the Spin-off as more fully described in the Company's Form
10-K for the year ended July 31, 2003, filed on November 3, 2003 and the
Company's 10-Q for the quarter ended October 31, 2003, filed on December 17,
2003. In connection with the Spin-off, the Company will be required to obtain
consents from the holders of the Promissory Notes to complete the Spin-off. This
amendment will provide for the consent by the holders of the Promissory Notes
for the Company to complete the Spin-off under the terms described below
The Company also desires to remove Investec as the collateral agent in
connection with the Promissory Notes. This amendment will provide for consent by
the holders of the Promissory Notes for the Company to replace Investec as
collateral agent replacing them with The Law Offices of Kevin Finck, counsel to
the Company.
This amendment will also provide for consent by the holders of the
Promissory Notes for the collateral agent to immediately release 1,000,000
shares of common stock of the Company owned by Mr. Jerome Richter (the "Shares")
and pledged as security in connection with the Promissory Notes upon the
Company's perfection of security interest in certain assets as described below.
The parties agree to establish a mutually agreeable escrow agent to hold the
Shares.
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and you hereby agree that your Original
Documents shall be, and hereby are, amended, effective from and after December
15, 2003, to the fullest extent necessary to effectuate the following:
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Amendment To Promissory Notes
January 13, 2004
Page 3 of 8
1. Promissory Notes. The Promissory Notes held by you are hereby amended to
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the full extent necessary to effectuate the following:
(a) Extend the payment due date from "December 15, 2003" to
"December 15, 2005".
(b) Principal payments shall be due on December 15, 2005.
(c) The Promissory Notes may be repaid by the Company in whole
or part at any time prior to December 15, 2005 without
penalty.
(d) Payment of interest on the Promissory Notes outstanding at
the rate of 16.50% per annum payable as follows: The
December 15, 2003 payment which has yet to be made will be
paid on the execution date of this Amendment and remaining
quarterly interest will be paid on March 15, 2004, June 15,
2004, September 15, 2004, December 15, 2004, March 15, 2005,
June 15, 2005, September 15, 2005 and December 15, 2005.
2. Additional Payment. The Company will pay to you a fee equal to 1.5% on the
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principal amount of your Promissory Notes which are outstanding on each of
the following dates; December 15, 2003, March 15, 2004, June 15, 2004,
September 15, 2004, December 15, 2004, March 15, 2005, June 15, 2005,
September 15, 2005 and December 15, 2005. The fee will be payable in
accordance with the interest payment dates described in 1(d) above. The fee
is not due on any principal balance which is paid down during any of the
interim periods. The fee payable for the Additional Notes is 2.0%.
3. Warrants. The Company will extend the expiration date on those warrants
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which you received in connection with the original issuance of the
Promissory Notes and related amendments. The current expiration date on
those warrants shall be changed from "December 15, 2006" to "December 15,
2008".
In connection with the above, the Company will issue to the holder of the
New Notes and Additional Notes new warrants under the same terms and
conditions of the warrants issued to the holders of the Restructured Notes.
4. Issuance of Rio Vista Warrants. In the event that the Spin-off is
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successfully completed by the Company (see 9. below), the Company agrees
that the holders of the Promissory Notes shall be entitled to receive
warrants to purchase units of Rio Vista under the following terms and
conditions:
a. Holder of the Promissory Notes shall be entitled to receive 2,500
warrants to purchase units of Rio Vista for every $100,000 of
principal of Promissory Notes extended,
b. Holder of the Promissory Notes shall be entitled to receive an
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Amendment To Promissory Notes
January 13, 2004
Page 4 of 8
additional 2,500 warrants to purchase units of Rio Vista for
every $100,000 of principal of Promissory Notes outstanding at
December 16, 2004,
c. Exercise price of all warrants will be based on the 1st qtly
distribution paid by Rio Vista, annualized, to provide a 20%
yield (example: Dividend $.25. Annualized $1.00, Exercise price
$5.00),
d. The expiration date of warrants will be December 15, 2006,
e. The warrants will be callable by Rio Vista in the event that the
annualized current dividend provides a 10% yield based on the
average common unit trading price for 30 consecutive days,
f. Issuance of the warrants herein are only required if Rio Vista is
successfully Spun-off. No additional obligation from the Company
to the holder of the Promissory Notes if the Company does not
complete the Spin-off of Rio Vista,
5. RZB Subordination. You hereby agree that the attached draft subordination
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letter from RZB is satisfactory (see Exhibit A) in connection with RZB's
agreement to refrain from taking any action against certain assets of the
Company until all the Promissory Notes have been fully repaid
6. Agreement Not To Pledge Assets: The Company agrees that it will not pledge
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any of its assets before or after the Spin-off occurs nor will it allow Rio
Vista to pledge any of its assets without the consent of the Borrower and
the holders of the Replacement Notes. The Company further agrees that it
will on a good faith basis provide the holders of the Promissory Notes and
the Replacement Notes a perfected security interest in the US portion of
its owned pipelines, except that such perfection will not be attempted
until the Cowboy and Tanner obligations have been fully repaid, expected to
be no later than March 31, 2004. The Company is not responsible for any
consents which cannot be obtained in connection with such perfection.
7. Collateral Agent. Investec will no longer serve as collateral agent in
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connection with the Promissory Notes and be replaced by "The Law Offices of
Kevin Finck"
8. Release of Collateral. Upon the perfection of the security interest
-----------------------
described in 6. above, the holders of the Promissory Notes hereby consent
to the immediate release of 1,000,000 shares of common stock of the Company
owned by Mr. Jerome Richter (the "Shares") and pledged as additional
security in connection obligations owing by the Company under the
Promissory Notes. In addition, the parties agree to determine a mutually
agreeable escrow agent to retain custody of the Shares during the time that
the Promissory Notes are outstanding.
9. Consent to Spin-off. The holders of the Promissory Notes hereby consent to
---------------------
the Company completing the Spin-off as more fully described in the Form 10
filed by Rio Vista Energy Partners L.P. ("Rio Vista") with the SEC, as
amended, and
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Amendment To Promissory Notes
January 13, 2004
Page 5 of 8
as described in the Company's Form 10-K for the year ended July 31, 2003,
and Form 10-Q for the quarter ended October 31, 2003 provided that the
Spin-off provides for the following:
a. The Company or Rio Vista Energy Partners L.P. ("Rio Vista") will
be prohibited from entering into any further agreement to pledge
any of its pipeline or terminal assets until the Promissory Notes
have been paid in full
b. Rio Vista will guaranty performance under the Promissory Notes
c. Rio Vista will be prohibited from making any distributions
("Distributions") to unitholders to the extent that any payments
required as of the date of the Distribution have not been made.
d. The form of providing for the above conditions will be documented
by the Company on a good faith basis
10. Philadelphia Brokerage Corporation. In connection with the restructuring of
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the Promissory Notes, the Company has agreed to pay Philadelphia Brokerage
Corporation a fee of 1.5% of the total amount of Promissory Notes
restructured and the total amount of Replacement Notes issued (see below).
In addition, Philadelphia Brokerage Corporation will receive 10,000
warrants to purchase units in Rio Vista at the time this Amendment is
executed and 10,000 additional warrants on December 16, 2004 (or a pro rata
portion thereon based on the remaining principal amount of Promissory Notes
and Replacement Notes outstanding at December 16, 2003 and the total amount
of Promissory Notes and Replacements at the time this amendment is
executed. The terms and conditions of the warrants will be the same as
those issued to the holders of the Promissory Notes as described in 4.
above.
11. Declining Noteholders. Notwithstanding anything to the contrary contained
-----------------------
in your Original Documents, you hereby agree that, to the extent that any
other holders of the Promissory Notes do not agree to this amendment letter
by December 13, 2003 (collectively, the "Declining Promissory
Noteholders"), the Company shall be entitled to repay such Declining
Promissory Noteholders all amounts owing by the Company to such Declining
Promissory Noteholders under their respective Original Documents without,
by virtue thereof, in any way breaching or otherwise being in default of
any of your Original Documents. Any such amounts paid, shall be excluded
from the definition of "Financing" provided for in your Original Documents.
In addition to the above, to the extent that any amounts are required to be
repaid in connection with Declining Noteholders, you hereby agree to allow
the Company to obtain additional financing (the "Replacement Notes") equal
to the amount of Promissory Notes repaid to the Declining Noteholders under
the same
5
Amendment To Promissory Notes
January 13, 2004
Page 6 of 8
terms and conditions outlined in this Amendment, except that the holders of
the Replacement Notes shall not be entitled to receive any warrants in the
Company which were issued in connection with the Restructured Notes. In
addition, you agree that the holders of the Replacement Notes shall
participate pari-pasu with any collateral granted to the holders of the
Promissory Notes.
If you are in agreement with the terms of this amendment letter, please
indicate so by signing below and faxing an executed copy to Ian Bothwell at
(760) 772-8588 no later than the close of business on January 16, 2004.
Very truly yours,
Penn Octane Corporation
By: __________________________________
Its: Vice President and Chief Financial Officer
6
The undersigned holder of the Promissory Note and other Original Documents
referred to in this amendment letter hereby acknowledges his/her/its agreement
to all of the provisions of this amendment letter and intention to be so bound.
The undersigned also agrees to keep the contents of this amendment letter and
any documents or discussions regarding the same strictly confidential and not to
use the same for any purpose pending public disclosure thereof by the Company;
provided, however, that the undersigned may consult with his, her or its agents
and advisors with respect to the transactions contemplated hereby and, in
connection therewith, disclose the terms and contents of this amendment letter
and any other documents relating to the subject matter thereof or hereof.
FirstName LastName
Company
Company1
By: __________________________________
Its: _________________________________
Date:_________________________________
Promissory Note Amount: $ Note Amt
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Name and Telephone Number of Holder:
____________________________________
____________________________________
____________________________________
Amendment To Promissory Notes
January 13, 2004
Page 8 of 8
EXHIBIT A - DRAFT
This letter will confirm that RZB Finance LLC ("RZB") agrees to subordinate its
liens and security interests in all of Penn Octane Corporation's (the "Company")
assets, personal property, fixtures, intangibles and property constituting
Collateral (as defined in the General Security Agreement between the Company and
RZB), except for (i) cash held in the Company's accounts at RZB, (ii) inventory
of every type and description, whether raw, in process or finished and all
documents, documents of title and receipts covering any inventory and all
products and proceeds thereof; (iii) accounts, accounts receivable, contract
rights, general intangibles, payment intangibles, tax refund claims,
instruments, promissory notes, chattel paper, supporting obligations, letters of
credit and letter-of-credit rights and other rights to payment of money and all
products and proceeds thereof; (iv) the Seadrift lease dated October 2003, as
amended, modified or supplemented from time to time; (v) the Company's LPG
supply agreements and all rights and remedies relating thereto and (vi) the PMI
agreements, as to all of the foregoing items in clauses (i) through and
including (vi), whether now owned or hereafter acquired and wherever located
(all such property, except the property described in clauses (i) through and
including (vi), the "Subordinated Collateral").
Accordingly, RZB consents that the Subordinated Collateral can be pledged by the
Company to the Company's existing creditors (which shall be deemed to include
those creditors which may substitute as note holders in connection with existing
indebtedness, and the holders of any indebtedness incurred to refinance existing
indebtedness) and RZB agrees that it shall not take any action which would
prevent such creditors (the "Senior Creditors") from foreclosing and enforcing
liens superior to RZB in such Subordinated Collateral in the event the Company
is in default under the related indebtedness.
Except as expressly set forth herein, nothing contained herein shall limit or
affect any of RZB's rights or remedies against the Company.
This agreement shall be governed by the laws of the State of New York without
regard to principles of conflicts of law. Unless the context otherwise
requires, all terms used herein which are defined in the Uniform Commercial Code
of the State of New York as in effect from time to time shall have the meanings
therein stated. The subordination contained herein is conditioned upon the
parties submitting and consenting to the exclusive jurisdiction of the Courts of
the State of New York located in New York County and of the United States
District Court for the Southern District of New York in connection with any
action or proceeding under, arising from or relating to this Agreement. The
subordination contained herein is conditioned upon the parties waiving, to the
fullest extent they may effectively do so, the defense of an inconvenient forum
to the maintenance of such action or proceeding. Each of the parties agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The Senior Creditors and RZB hereby IRREVOCABLY WAIVE
TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING UNDER OR RELATING TO THIS
AGREEMENT.
The subordination contained herein is conditioned upon the Senior Creditors not
challenging or disputing (a) the validity, perfection or priority of RZB's
security interest in any Collateral (other than Subordinated Collateral), or (b)
any relief requested by RZB to protect or realize on its Collateral (other than
Subordinated Collateral) in any bankruptcy case with respect to the Company
including, without limitation, any cash collateral order or debtor-in-possession
financing.
This agreement is solely for the benefit of RZB and the Senior Creditors and
their successors and assigns and no other person shall have any right or benefit
under or because of the existence of this Agreement.
The Senior Creditors shall permit use of any collateral subject to their senior
security interest for storage, processing, transportation or delivery of RZB's
collateral for a period of 60 days after notice from the Senior Creditors or
their representative to RZB of the beginning of such 60-day period, all without
charge, cost or expense to RZB.