EXHIBIT A
ROYALTY NOTE
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Not to Exceed $ 3,000,000.00 , 199_
FOR VALUE RECEIVED, the undersigned, XXXXXX ACQUISITION CORPORATION, a
Delaware corporation ("Payor"), promises to pay to XXXXXX TECHNOLOGIES
INCORPORATED, a California corporation ("Payee"), or order, a Royalty (as
defined below), not to exceed the sum of Three Million Dollars ($
3,000,000.00), or such lesser amount as shall be determined as herein
provided, pursuant to the manner hereinafter set forth:
1. Royalty. Commencing on the date hereof, and extending until the
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earlier of five (5) years after the date hereof or such time as Payor has paid
to Payee the sum of Three Million Dollars, or such lesser amount as shall be
determined in accordance with the provisions hereof, (the "Royalty Period"), a
Royalty shall accrue in an amount equal to five percent (5%) of Net Revenues
(as defined below) (the "Royalty"). The Royalty shall be due and payable by
Payor to Payee commencing forty-five days after the end of the Buyer's first
fiscal quarter arising after the date hereof and continuing thereafter within
forty-five (45) days after the end of each of Payor's successive fiscal
quarters (or portion thereof) included in the Royalty Period (collectively,
the "Royalty Payments"). The term "Net Revenues" shall mean the gross amount
of revenues received by Payor or its affiliates from the sale of products or
the performance of services related to selling, designing, manufacturing,
installing and servicing compressed natural gas ("CNG") refueling stations and
related products for use in the CNG industry throughout the world (the
"Business"), less (a) returns, credits, discounts and allowances, (b) free
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goods programs, (c) freight, transportation and insurance charges, and (d)
sales, excise and similar taxes added to the invoice; provided, however, that
this amount shall not include revenues arising from the sale of CNG, the sale
of CNG-powered vehicles, or the conversion of vehicles to CNG-powered
vehicles.
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2. Stock Payment Option. At the option of Payee, Royalty Payments
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may be made in restricted shares of common stock, $.01 par value, of Penn
Octane Corporation, a Delaware corporation ("POC") at a value equal to eighty
percent (80%) of the market price per share quoted by NASDAQ on the last day
of Payor's fiscal quarter for which each Royalty Payment is due; provided,
however, that, whichever election Xxxxxxxxx Holdings, Inc., a California
corporation ("ZHI"), makes with respect to the receipt of cash or stock under
that certain Convertible Debenture issued by POC in favor of ZHI of even date
herewith, such election shall be applicable to the form of additional Royalty
Payments hereunder; provided, further, however, that in the event Payee
assigns this Royalty Note to an individual or entity, other than XXX, Xxxxxxx
X. Xxxxxxxxx ("Xxxxxxxxx") or an affiliate thereof, such entity shall have no
right to receive stock in lieu of cash under this Royalty Note, but under such
circumstance, Payor shall have the option, but not the obligation, to pay
Royalty Payments
due and payable hereunder in POC Common Stock (as defined in Section 3
hereof).
3. Registration Rights. The following registration rights shall
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apply to any shares of common stock, $.01 par value, of POC ("POC Common
Stock") received in lieu of Royalty Payments under this the Royalty Note:
(a) If POC shall determine to register any of its securities
(other than a Form S-8 or other form suitable for employee benefit plans)
either for its own account or the account of any investor who holds
registrable securities or to whom registration rights have been conferred by
POC (hereinafter "Holders"), POC shall:
(i) promptly give Payee written notice thereof; and,
(ii) include in such registration (and in any related
qualification under blue sky laws, the securities laws of any state where the
securities are to be issued, or any other compliance), and in any underwriting
involved therein, all of the securities specified in a written request made by
Payee to POC within twenty (20) days after the written notice from POC
described in clause (i) above (the ARegisterable Securities@).
(b) If the registration of which POC gives notice is for a
registered public offering involving an underwriter, POC shall so advise Payee
as part of the written notice given pursuant to Section 3(a)(i) above.
(c) All registration expenses incurred in connection with any
registration, qualification or compliance pursuant to this Section 3 shall be
borne by POC; provided, however, that Payee shall bear its own legal and
accounting fees and costs and any underwriting discounts or commissions
incurred in connection with the sale of its shares of POC.
(d) In the case of registration effected by POC pursuant to this
Section 3, POC shall keep Payee advised in writing as to the initiation of
each registration and as to the completion thereof. At its expense, POC shall
use its best efforts to:
(i) Keep registration effective for a period of one hundred
twenty (120) days or until Payee has completed the distribution described in
the registration statement relating thereto, whichever first occurs; provided,
however, that such 120-day period shall be extended for a period of time equal
to the period Payee refrains from selling any securities included in such
registration at the request of an underwriter of POC;
(ii) Prepare and file with the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act of 1933 (the ACommission@) such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Securities Act of 1933, as amended, or any similar successor federal
statute and the rules and regulations thereunder (the ASecurities Act@), with
respect to the disposition of all securities covered by such registration
statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus,
as Payee may from time to time request;
(iv) Notify Payee at any time when a prospectus relating to
the Registerable Securities is required to be delivered under the Securities
Act of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in light of the circumstances then existing, and at the request of
any such seller, prepare and furnish such seller a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in light of the circumstances
then existing;
(v) Cause such Registerable Securities registered pursuant
to this Section 3 to be listed on each securities
exchange on which similar securities issued by POC are then listed;
(vi) Provide a transfer agent and registrar for all
Registerable Securities registered pursuant hereto not later than the
effective date of such registration; and
(vii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than 18 months,
beginning with the first month after the effective date of a registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(e) POC will indemnify Payee, each of its officers, directors
and partners, legal counsel and accountants and each person controlling Payee
within the meaning of Section 15 of the Securities Act and Section 13 of the
Exchange Act, with respect to which registration, qualification or compliance
has been effected pursuant hereunder, and each underwriter, if any, and each
person who controls, within the meaning of Section 15 of the Securities Act
and Section 13 of the Exchange Act, any underwriter, against all expenses,
claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by POC of the Securities Act or any rule or regulation thereunder
applicable to POC and relating to action or inaction required by POC in
connection with any such registration, qualification or compliance, and will
reimburse Payee, each of its officers, directors, partners, legal counsel and
accountants and each person controlling Payee, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending or settling
any such claim, loss, damage, liability or action.
Payee shall give notice to POC, under this section, promptly after Payee
has actual knowledge of any claim as to which indemnity might be sought, and
shall permit POC to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for POC, who shall conduct the
defense of such claim or any litigation resulting therefrom, shall be approved
by Payee (whose approval shall not be unreasonably withheld), and Payee may
participate in such defense at Payee's expense, and provided further that the
failure of Payee to give notice as provided herein shall not relieve POC of
its obligations under this Section 3(e), to the extent such failure is not
prejudicial. POC shall not, in the defense of any such claim or litigation,
except with the consent of Xxxxx, consent to the entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to Payee of a release from all
liability in respect to such claim or litigation. Payee shall furnish such
information regarding itself or the claim in question as POC may reasonably
request in writing and as shall be reasonably required in connection with the
defense of such claim and litigation resulting therefrom.
If the indemnification provided for in this Section 3(e) is held by a
court of competent jurisdiction to be unavailable to Payee with respect to any
loss, liability, claim, damage or expense referred to therein, then POC, in
lieu of indemnifying Payee hereunder, shall contribute to the amount paid or
payable by Payee as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of POC on
the one hand and of Payee on the other in connection with the statements or
omissions which resulted in such loss, liability, claim, damage or expense as
well as any other relevant equitable considerations. The relative fault of
POC and Payee shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by POC or by Xxxxx and
the parties= relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement
entered into in connection with any underwritten public offering are in
conflict with the foregoing, the provisions in the underwriting agreement
shall control.
(f) With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of
restricted securities to the public without registration, POC agrees, so long
as Company, ZHI, Xxxxxxxxx or any affiliate thereof owns any POC Common Stock
acquired pursuant to this Royalty Note, to use its reasonable best efforts to:
(i) make and keep public information, as those terms are
understood and defined in Rule 144 as promulgated by the Commission under the
Securities Act, as such rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission ("Rule 144"), at all
times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by POC for an offering of
its securities to the general public;
(ii) file with the Commission in a timely manner all
reports and other documents required of POC under the Securities Act and the
Securities Exchange Act of 1934, as amended, or any similar successor federal
statute and the rules
and regulations thereunder (the AExchange Act@), at any time after it has
become subject to such reporting requirements; and
(iii) furnish to Payee forthwith upon written request a written
statement by POC as to its compliance with the reporting requirements of Rule
144 (at any time from ninety (90) days following the effective date of the
first registration statement filed by POC for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of POC, and such other reports and
documents so filed as Payee may reasonably request in availing itself of any
rule or regulation of the Commission allowing Payee to sell any such
securities without registration.
(g) POC shall not limit the number of Registerable Securities to
be included in a registration pursuant to this Section 3 in order to include
in the offering any of the following:
(i) shares held by stockholders with no registration
rights;
(ii) founder=s stock or any other shares of stock issued to
employees, officers, directors or consultants pursuant to any POC employee
stock option plan; or,
(iii) securities registered for POC=s own account unless POC
determines in good faith based upon the advice of its underwriter that an
offering of Registerable Securities in conjunction with securities registered
for POC's own account is not feasible or impracticable and will not be
successful in the marketplace.
(h) Xxxxx's rights under this Section 3 shall expire upon the
earlier to occur of the following:
(i) expiration of the applicable holding periods
restricting the resale of POC Common Stock set forth in Rule 144; and
(ii) the occurrence of two (2) registrations effected by
POC after the last issuance of POC Common Stock hereunder.
(i) Any share certificates delivered pursuant hereto shall bear
appropriate legends.
4. Investment Representations.
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(a) Payee is familiar with the business and financial condition,
properties, operations and prospects of POC;
(b) Payee has been given full access to all material information
concerning the condition, properties, operations and prospects of POC. Xxxxx
and its advisors have had an opportunity to ask questions of, and to receive
information from, POC and persons acting on its behalf concerning the terms
and conditions of Xxxxx's receipt of POC Common Stock, and to obtain any
additional information necessary to verify the accuracy of the information and
date received by Xxxxx. Xxxxx is satisfied that there is no material
information concerning the condition,
properties, operations and prospects of POC of which the Payee is unaware;
and,
(c) Payee has made, either alone or together with its advisors,
such independent investigation of POC, its management and related matters as
Payee deems to be, or Xxxxx's advisors have advised to be, necessary or
advisable in connection with its receipt of POC Common Stock; and Payee and
its advisors have received all information and data which Payee and its
advisors believe to be necessary in order to reach in informed decision as to
the advisability of receiving POC Common Stock; and,
(d) Any POC Common Stock acquired by Payee hereunder is being
acquired for investment purposes for its own account and not with a view
towards distribution; Payee shall not dispose of any POC Common Stock except
in compliance with applicable securities laws.
5. Cessation of Business. In the event that Payor is unable to
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realize a rate of return from the Business customary for the CNG business or
businesses similar to the CNG business, Payor shall have the right to cease
operations of the Business and shall have no further obligation under this
Royalty Note; provided, however, that no affiliate of Payor continues in
activities related to or a part of the Business other than the sale of CNG and
CNG-powered vehicles and the conversion of vehicles to CNG-powered vehicles.
6. Sale of Business. Should Payor elect to sell the Business prior
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to the expiration of the Royalty Period, Payor shall pay to Payee fifty
percent (50%) of the total consideration received from the sale of the
Business up to the total amount of Three Million Dollars ($3,000,000.00) less
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the total Royalty Payments received prior thereto by Payee and offsets, if
any, against the total amount of Royalty owing hereunder as set forth in
Section 7 hereof; provided, however, that in the event that Buyer should sell
the Business prior to one (1) year after the date hereof, Buyer shall not be
entitled to any offsets against this Royalty Note for the Royalty Adjustment
(as defined in Section 8 below).
7. Offset. The total amount of Royalty due and payable hereunder
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shall be subject to offset for (a) Royalty Payments paid by Payor to Payee
pursuant to that certain Interim Operating Agreement between Payor and Payee,
(b) the Royalty Note Adjustment (as defined in Section 1.06 of that certain
Purchase Agreement (the "Purchase Agreement") among Payee, and ZHI, on the one
hand, and Payor and POC, on the other hand), (c) any amounts due for warranty
work performed by Xxxxx as provided in Section 13.07 of the Purchase
Agreement, (d) Damages (as defined in Section 14.01 of the Purchase
Agreement), and (e) any amounts paid by Payee to Company's creditors pursuant
to Section 1.10 of the Interim Operating Agreement. Notwithstanding the
foregoing, Payee shall continue to make, when due, Royalty Payments hereunder.
8. Inspection Rights. During the Royalty Period, Payor shall keep
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accurate records of all Net Revenues (as defined in Section 1 hereof),
including sales made by affiliates of Buyer, and with each payment made
pursuant to this Royalty Note shall deliver to Payee a report indicating the
Net Revenues for the corresponding fiscal quarter, and Payee and its
representatives shall have the right, not more than once in each of Payor's
fiscal quarters during the Royalty Period, and upon reasonable notice and
during normal business hours, to audit and inspect, at Xxxxx's sole cost and
expense, Payor's records of Net Revenues for all such fiscal quarters;
provided, however, that in no event shall Payee have the right to audit any
period more than once.
9. Royalty Payments Pending Royalty Note Adjustment. Notwithstanding
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anything to the contrary contained herein, Payor shall have no obligation to
pay to Payee Royalty Payments hereunder in excess of One Million Nine Hundred
Thousand Dollars ($1,900,000) during the period commencing the date hereof and
ending as of the first anniversary of the date hereof.
10. Late Charge. Any payment of accrued Royalty which is not paid on
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the due date therefor, and which remains unpaid after ten (10) business days
written notice by Payee to Payor, shall bear a late charge equal to five
percent (5%) of the amount of the accrued Royalty which is not paid when due.
Xxxxx acknowledges that this late charge represents fair compensation for any
loss which would be sustained by Payee for administrative expenses and cost of
money wrongfully withheld by Payor. Such late charge shall be paid with the
accrued Royalty with respect to which it is accrued. In the event that the
late charge is deemed to constitute interest and to exceed the maximum rate of
interest allowable under applicable law, then the obligation to be fulfilled
shall be reduced automatically to the extent necessary to prevent the
effective rate of interest from exceeding the maximum legal rate.
11. Costs of Collection. Should Payor fail to pay any amounts due
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under this Royalty Note or any portion thereof in a timely manner, Payee shall
be entitled to, and Xxxxx agrees to pay to Payee immediately upon demand
therefor by Xxxxx, all costs and expenses of collection, including, without
limitation, attorney's fees and all other expenses of enforcing payment.
12. Waiver. The rights and remedies of Payee under this Royalty Note
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shall be cumulative and not alternative. No waiver by Payee of any right or
remedy under this Royalty Note shall be effective unless in a writing signed
by Xxxxx. Neither the failure nor any delay in exercising any right, power or
privilege under this Royalty Note will operate as a waiver of such right,
power or privilege and no single or partial exercise of any such right, power
or privilege by Xxxxx will preclude any other or further exercise of such
right, power or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right of Payee arising out of this Royalty Note can be
discharged by Payee, in whole or in part, by a waiver or renunciation of the
claim or right unless in a writing, signed by Xxxxx; (b) no waiver that may be
given by Payee will be applicable except in the specific instance for which it
is given; and, (c) no notice or demand on Payor will be deemed to be a waiver
of any obligation of Payor or the right of Payee to take further action
without notice or demand as provided in this Royalty Note. Payor hereby
waives presentment, demand, protest and notice of dishonor and protest and any
other notice of any kind, except as expressly provided for herein.
13. Notice. Any notice or other communication provided for in this
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Royalty Note shall be in writing and sent to the parties named at the
addresses listed below or at such other address as the parties may from time
to time in writing designate.
To Payor: Xxxxxx Acquisition Corporation
c/o Penn Octane Corporation
0000 Xxx Xxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxx 00000
Attn: Xxxxxx X. Xxxxxxx
Tel: (000) 000-0000
Fax: (000) 000-0000
Copy to: Coudert Brothers
0000 Xxxxxx xx xxx Xxxxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxxxxx X. Xxxxx, Esq.
Tel: (000) 000-0000
Fax: (000) 000-0000
To Payee: Xxxxxx Technologies Incorporated
c/x Xxxxxxxxx Holdings, Inc.
0000 Xxxxxxx Xxxxxx, Xxxxx 000
Xxx Xxxxxx, XX 00000-0000
Attn.: Xxxxxxx X. Xxxxxxxxx
Tel: (000) 000-0000
Fax: (000) 000-0000
Copy to: Rodi, Xxxxxxx, Xxxxxxx, Galbraith
& Xxxxxx, A Law Corporation
000 Xxxxx Xxxxx Xxxxxx, Xxxxx 000
Xxx Xxxxxxx, XX 00000
Attn.: Xxxxx X. Xxxxxx, Xx., Esq.
Tel: (000) 000-0000
Fax: (000) 000-0000
Any notice or communication that is properly addressed as provided in this
Paragraph, will be deemed received (a) upon delivery, if delivered personally,
(b) on the third business day after deposit in a regular depository of the
United States mail, if delivered by United States registered or certified
first class mail, (c) on the day of transmission, if delivered by facsimile,
unless such transmission is sent after 3:00 p.m. (time of the receiving
party), or on a day which is not a business day of the receiving party, in
which case such transmission will be deemed received on the first business day
after the transmission, and (d) on the first business day of the receiving
party after the delivery to the courier, if delivered by overnight courier.
Any party from time to time may change its address for the purpose of this
provision by furnishing a notice in accordance with this Section.
14. Severability. If any provision of this Royalty Note is held
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invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Royalty Note will remain in full force and effect. Any
provision of this Royalty Note held unenforceable only in part or degree will
remain in
full force and effect to the extent not held invalid or unenforceable.
15. Governing Law. This Royalty Note shall be governed by the laws
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of the State of California without regard to conflicts of laws principles.
16. Parties in Interest. This Royalty Note shall bind Payor and
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Payee and their successors and assigns.
17. Security. This Royalty Note is guaranteed by POC pursuant to
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Section 13.08 of that certain Purchase Agreement dated March 7, 1997, among
Payee and ZHI, on the one hand, and Payor and POC, on the other hand.
18. Assignment. This Royalty Note may be assigned by Payee to any
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affiliate of Payee or any creditor of Payee without prior consent of Payor;
provided, however, that in the event Payee assigns this Royalty Note to an
individual or entity, other than ZHI, Xxxxxxxxx or an affiliate thereof, such
individual or entity shall have no right to receive stock in lieu of cash
under this Royalty Note.
IN WITNESS WHEREOF, the undersigned has duly executed this Royalty Note
on the day and year first above written.
XXXXXX ACQUISITION CORPORATION,
a Delaware Corporation
By:
Its:
[Signatures continued on next page]
The undersigned hereby acknowledges and agrees to be bound by Section 3
hereof.
PENN OCTANE CORPORATION, a
Delaware corporation
By:
Its:
[Signatures continued from previous page]
