<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended_________________________________________________
Commission file number: 0-10990
CASTLE ENERGY CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
One Radnor Corporate Center, Suite 250,
100 Matsonford Road, Radnor, Pennsylvania 19087
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 995-9400
--------------
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 2,940,729 shares of
Common Stock, $.50 par value outstanding as of February 10, 1999.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1998
(Unaudited) and September 30, 1998........................................ 1
Consolidated Statements of Operations - Three Months
Ended December 31, 1998 and 1997 (Unaudited).............................. 2
Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1998 and 1997 (Unaudited).............................. 3
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1998 and Three Months Ended
December 31, 1998 (Unaudited)............................................. 4
Notes to the Consolidated Financial Statements (Unaudited)................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 11
Part II. Other Information
Item 1. Legal Proceedings......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
Signature ................................................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $40,447 $36,600
Restricted cash............................................................. 912 613
Accounts receivable.......................................................... 8,717 8,381
Marketable securities........................................................ 471 471
Prepaid transportation, net.................................................. 664 1,123
Prepaid expenses and other current assets.................................... 281 293
Prepaid gas purchases........................................................ 852 852
Deferred income taxes........................................................ 1,431 2,765
Note receivable - Penn Octane Corporation.................................... 1,000 1,000
Estimated realizable value of discontinued net refining assets............... 3,622 3,623
------- -------
Total current assets...................................................... 58,397 55,721
Property, plant and equipment, net:
Natural gas transmission..................................................... 61 62
Furniture, fixtures and equipment............................................ 301 307
Oil and gas properties, net (full cost method).................................. 4,720 4,600
Gas contracts, net.............................................................. 3,918 6,285
Other assets.................................................................... 29 29
------- -------
Total assets.............................................................. $67,426 $67,004
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 7,181 $ 8,658
Accrued expenses............................................................. 1,494 1,663
Net refining liabilities retained............................................ 5,129 5,129
------- -------
Total current liabilities................................................. 13,804 15,450
Other long-term liabilities..................................................... 1 1
------- -------
Total liabilities......................................................... 13,805 15,451
------- -------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00;
10,000,000 shares authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized;
6,803,646 issued at December 31, 1998 and September 30, 1998.............. 3,402 3,402
Additional paid-in capital...................................................... 67,122 67,122
Retained earnings............................................................... 36,904 34,836
------- -------
107,428 105,360
Treasury stock at cost - 3,862,917 shares at December 31, 1998 and
September 30, 1998........................................................... (53,807) (53,807)
------- -------
Total stockholders' equity................................................ 53,621 51,553
------- -------
Total liabilities and stockholders' equity................................ $67,426 $67,004
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.......................................................... $ 20,455 $ 20,263
---------- ----------
20,455 20,263
---------- ----------
Exploration and production:
Oil and gas sales.................................................. 391 658
Well operations.................................................... 90 58
---------- ----------
481 716
---------- ----------
20,936 20,979
---------- ----------
Expenses:
Natural gas marketing and transmission:
Gas purchases...................................................... 12,946 13,086
Transportation..................................................... 459 460
General and administrative......................................... 89 26
Amortization....................................................... 2,366 2,365
---------- ----------
15,860 15,937
---------- ----------
Exploration and production:
Oil and gas production............................................. 194 165
General and administrative......................................... 247 222
Depreciation, depletion and amortization........................... 67 163
---------- ----------
508 550
---------- ----------
Corporate general and administrative expenses........................ 1,113 740
---------- ----------
17,481 17,227
---------- ----------
Operating income......................................................... 3,455 3,752
<PAGE>
Other income:
Interest income.................................................... 467 637
Other income....................................................... 1 21
---------- ----------
468 658
---------- ----------
Net income before provision for income taxes............................. 3,923 4,410
---------- ----------
Provision for income taxes:
State.............................................................. 39 44
Federal............................................................ 1,373 1,544
---------- ----------
1,412 1,588
---------- ----------
Net income............................................................... 2,511 2,822
Adjustments for comprehensive income.....................................
---------- ----------
Comprehensive income..................................................... $ 2,511 $ 2,822
========== ==========
Net income per share:
Basic.............................................................. $ .85 $ .60
========== ==========
Diluted............................................................ $ .84 $ .59
========== ==========
Weighted average number of common and common equivalent shares outstanding:
Basic.............................................................. 2,940,729 4,715,546
========== ==========
Diluted............................................................ 3,001,242 4,745,690
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net cash flow provided by operating activities........................... $ 4,505 $17,601
------- -------
Cash flows from investing activities:
Investment in oil and gas properties................................... (186) (762)
Investment in note receivable - Penn Octane Corporation................ (1,000)
Investment in furniture, fixtures and equipment........................ (29)
------- -------
Net cash (used in) investing activities............................ (215) (1,762)
------- -------
Cash flows from financing activities:
Dividends paid to stockholders......................................... (443) (707)
Proceeds from exercise of stock options................................ 20
------- -------
Net cash (used in) financing activities............................ (443) (687)
------- -------
Net increase (decrease) in cash and cash equivalents..................... 3,847 15,152
Cash and cash equivalents - beginning of period.......................... 36,600 36,338
------- -------
Cash and cash equivalents - end of period................................ $40,447 $51,490
======= =======
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest........................................................... -- --
======= =======
Income taxes....................................................... -- $ 4
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
--------------------- Paid-In Retained ----------------------
Shares Amount Capital Earnings Shares Amount Total
--------- ------- ---------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1997............. 6,798,646 $3,399 $67,061 $22,468 2,085,100 ($25,163) $67,765
Stock acquired........................ 1,777,817 (28,644) (28,644)
Options exercised..................... 5,000 3 61 64
Dividends............................. (1,688) (1,688)
Net income............................ 14,056 14,056
--------- ------ ------- ------- --------- -------- -------
Balance - September 30, 1998.......... 6,803,646 3,402 67,122 34,836 3,862,917 (53,807) 51,553
Dividends............................. (443) (443)
Net income............................ 2,511 2,511
--------- ------ ------- ------- --------- -------- -------
Balance - December 31, 1998........... 6,803,646 $3,402 $67,122 $36,904 3,862,917 ($53,807) $53,621
========= ====== ======= ======= ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month period ended December 31, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 1999
or subsequent periods. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month periods ended December 31, 1998 and 1997 and
for a fair statement of financial position at December 31, 1998.
Note 2 - September 30, 1998 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1998
were derived from the Company's audited consolidated financial statements which
were included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
Note 3 - Discontinued Operations
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets and the purchasers
had assumed all related liabilities, including contingent environmental
liabilities. In addition, Powerine Oil Company ("Powerine"), one of the
Company's refining subsidiaries, merged into a subsidiary of the purchaser and
is no longer a subsidiary of the Company. The Company's remaining refining
subsidiaries own no refining assets and are in the process of liquidation. As a
result, the Company has accounted for its refining operations as discontinued
operations. Such discontinued refining operations have not impacted the
Company's operations since September 30, 1995 although they may impact the
Company's future operations.
Note 4 - Contingencies/Litigation
Contingent Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
were potentially liable for environmental costs related to air emissions, ground
and water contamination, hazardous waste disposal and third party claims related
to the foregoing. Between September 29, 1995 and December 12, 1995 both of the
refineries owned by the Company's refining subsidiaries were sold to outside
parties. In each case the purchaser assumed all environmental liabilities.
Furthermore, on January 16, 1996, Powerine, the subsidiary that previously owned
the Powerine Refinery, was effectively acquired by Energy Merchant Corp.
("EMC"), an unrelated party.
In July of 1996, the Company was named a defendant in a class action
lawsuit concerning emissions from the Powerine Refinery. Powerine previously
owned the Powerine Refinery, which is in Santa Fe Springs, California. In April
of 1997, the court granted the Company's motion to quash the plaintiff's
complaint based upon lack of jurisdiction and the Company is no longer involved
in the case.
During fiscal 1998, the Company was informed that the United States
Environmental Protection Agency ("EPA") was investigating offsite acid sludge
waste found near the Indian Refinery and was also investigating and remediating
surface contamination in the Indian Refinery property. The Indian Refinery,
located in Lawrenceville, Illinois, was previously operated by Indian Refinery I
Limited Partnership ("IRLP"), now an inactive subsidiary of the Company. Neither
the Company nor IRLP was named with respect to these two actions.
In October 1998, the EPA named the Company and two of its subsidiaries,
including IRLP, as potentially responsible parties for the expected overall
clean-up of the Indian Refinery. In addition, eighteen other parties were named
including Texaco Refining and Marketing, Inc., the refinery operator for
approximately 50 years. The Company subsequently responded to the EPA indicating
that it was neither the owner nor operator of the Indian Refinery and thus not
responsible for its remediation. Estimated undiscounted clean-up costs for the
Indian Refinery are $80,000 to $150,000 according to third parties. Although the
Company does not believe it has any liabilities with respect to the
environmental liabilities of the refineries, a court of competent jurisdiction
may find otherwise. A recent decision by the U.S. Supreme Court, however,
supports the Company's position.
As of November 20, 1998, neither of the refineries had restarted. The
Powerine Refinery was recently sold to an unrelated party, which, the Company
has been informed, is seeking financing to restart that Refinery. The purchaser
of the Indian Refinery, American Western Refining Limited Partnership ("American
Western"), defaulted on its $5 million note to IRLP, filed a voluntary petition
for bankruptcy in the United States Bankruptcy Court in the District of Delaware
under Chapter 11 of the United States Bankruptcy Code and sold the Indian
Refinery to another unrelated party. The new owner is in the process of
dismantling much of the Indian Refinery.
Although the environmental liabilities related to the Indian Refinery
and Powerine Refinery have been transferred to others, there can be no assurance
that the parties assuming such liabilities will be able to pay them. American
Western, purchaser of the Indian Refinery, filed for bankruptcy and is in the
process of liquidation. The current owner of the Powerine Refinery is still
seeking financing to restart that refinery. Furthermore, the Company and two of
its subsidiaries have been named as
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
potentially responsible parties for the remediation of the Indian Refinery by
the U.S. Environmental Protection Agency.
If funds for environmental clean-up are not provided by these former
and/or present owners, it is possible that the Company and/or one of its former
refining subsidiaries could be named a party in additional legal actions to
recover remediation costs. In recent years, government and other plaintiffs have
often sought redress for environmental liabilities from the party most capable
of payment without regard to responsibility or fault. Whether or not the Company
ultimately prevails in such a circumstance, should litigation involving the
Company, IRLP or Powerine occur, the Company would probably incur substantial
legal fees and experience a diversion of management resources from other
operations.
The Company does not believe it is liable for any of its subsidiaries'
clean-up costs. A recent decision of the U.S. Supreme Court favors the Company's
position. If the Company is sued for contingent environmental liabilities, it
intends to vigorously defend itself in such regard but the Company cannot
predict the ultimate outcome of these matters.
Litigation
There have been no material litigation developments since that reported
in Item No. 3 of the Company's Form 10-K for the year ended September 30, 1998.
Reference should be made to that document.
Note 5 - New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130") regarding
reporting comprehensive income, which establishes standards for reporting and
display of comprehensive income and its components. The components of
comprehensive income refer to revenues, expenses, gains and losses that are
excluded from net income under current accounting standards, including foreign
currency translation items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. SFAS 130
requires that all items recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed in equal
prominence with the other financial statements. The total of other comprehensive
income for a period is required to be transferred to a component of equity that
is separately displayed in a statement of financial condition at the end of an
accounting period. SFAS 130 is effective for both interim and annual periods for
companies having fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS 130 effective October
1, 1998 but SFAS130 has not yet impacted the Company's financial disclosures.
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
In June 1997, FASB issued Statement of Financial Accounting Standards
Board No. 131 ("SFAS 131") regarding disclosures about segments of an enterprise
and related information. SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
the reporting of selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for companies having fiscal years beginning
after December 15, 1997. The Company adopted SFAS No.131 effective October 1,
1998. The provisions of SFAS are not expected to materially change the Company's
disclosures and reported financial information because the Company already
presents required segment information in its consolidated statements of
operations.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness, as
well as the ineffective portion of the gain or loss, are reported in earnings
immediately. Accounting for foreign currency hedges is similar to the accounting
for fair value and cash flow hedges. If the derivative instrument is not
designated as a hedge, the gain or loss is recognized in earnings in the period
of change.
The Company expects to adopt SFAS 133 in fiscal 2000. To date all
hedging by the Company has been applicable to the Company's gas marketing
operations. Those operations are expected to end on May 31, 1999 when the
related gas contracts terminate. As a result, the Company believes SFAS 133 will
not affect existing operations and cannot make a determination as to whether it
will effect future operations until it engages in such operations.
Note 6 - Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market price of natural gas. Commodity derivatives
utilized as hedges of natural gas are futures contracts. Natural gas basis swaps
are sometimes used to hedge the basis differential between the
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
derivative financial instrument index price and the natural gas field price. In
order to qualify as a hedge, price movements in the underlying commodity
derivative must be highly correlated with the hedged commodity.
Gains and losses on futures contracts that qualify as a hedge of firmly
committed or anticipated purchases and sales of natural gas are deferred on the
balance sheet and credited or debited to cost of gas purchased and recognized in
operations when the related hedged transaction occurs. Gains or losses on
derivative financial instruments that do not qualify as a hedge are recognized
in income currently.
As a result of hedging transactions, the cost of gas purchased
increased $144 for the quarter ended December 31, 1998 and decreased $209 for
the quarter ended December 31, 1997.
Note 7 - Information Concerning Reportable Segments
During the three month periods ended December 31, 1998 and December 31,
1997, the Company operated in two business segments: oil and gas exploration and
production and natural gas marketing. The Company does not allocate interest
income, interest expense or income tax expense to these segments. The operating
profit (loss) achieved by each of the Company's segments was as follows:
Three months ended December 31, 1998:
Operating
Segment Revenues Expenses Profit (Loss)
- ------------------------------ -------- -------- -------------
1. Oil and gas exploration and
production $ 481 ($ 508) ($ 27)
2. Natural gas marketing 20,455 (15,860) 4,595
------- ------- -------
$20,936 ($16,368) $4,568
======= ======= ======
Three months ended December 31, 1997:
Operating
Segment Revenues Expenses Profit
- ------------------------------ -------- -------- -------------
1. Oil and gas exploration and
production $ 716 $ (550) $ 166
2. Natural gas marketing 20,263 (15,937) 4,326
------- ------- ------
$20,979 ($16,487) $4,492
======= ======= ======
The individual components of revenue and expenses for each segment are
set forth in the attached "Consolidated Statements of Operations."
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
Total assets applicable to each of the Company's two operating segments
were as follows:
December 31, September 30,
1998 1998
------------ -------------
Oil and gas exploration and production.......... $48,460 $49,724
Natural gas marketing........................... 66,132 62,424
Corporate and intercompany adjustments.......... (47,166) (45,144)
------- -------
$67,426 $67,004
======= =======
Note 8 - Penn Octane Note
In October 1997, the Company invested $1,000 in a promissory note of
Penn Octane Corporation ("Penn Octane"), a public company. The note bears
interest at 10% payable quarterly and was due on June 30, 1998. At June 30,
1998, Penn Octane did not repay the note. In May of 1998, Penn Octane was
awarded a judgement against a bank and such judgement is in excess of the $1,000
owed to the Company by Penn Octane. In December 1998, Penn Octane assigned its
interest in the bank judgement to the extent of the Company's note to the
Company in return for an extension of the note until June 30, 1999. The Company
also received 225,000 warrants to purchase the common stock of Penn Octane for
one dollar and seventy-five cents per share as consideration for the extension.
The bank owing the judgement has appealed it and such appeal may not be resolved
for a year or more. As a result, there can be no assurance that the judgement
will be upheld upon appeal or that the bank will ultimately pay the judgement
won by Penn Octane to the Company. If the note is not repaid by its extended due
date, the Company intends to reduce the Penn Octane note to its estimated
realizable value, if any.
Note 9 - Subsequent Event
In February 1999, an energy bank approved a $30,000 line of credit
for the Company.
-10-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. As a result, management's discussion and
analysis focuses primarily on the Company's continuing operations -- natural gas
marketing and oil and gas exploration and production. All references herein to
dollars are in thousands.
The Company desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and has included a
discussion of risk factors related to Management's Discussion and Analysis of
Financial Condition and Results of Operations. The discussion and analysis below
include forward-looking data that are based upon management's estimates,
assumptions and projections. Important factors such as the risk factors listed
below could cause results to differ materially from those expected by
management.
NATURAL GAS MARKETING
Two of the Company's subsidiaries have entered into two long-term gas
contracts. The first contract is with Lone Star Gas Company ("Lone Star") and
requires the Company's subsidiary to deliver to Lone Star 45,000,000 cubic feet
of natural gas per day ("Lone Star Contract"). The second contract is with MG
Natural Gas Corp. ("MGNG") and requires another subsidiary of the Company to
deliver approximately 6,400,000 cubic feet of natural gas per day ("MGNG
Contract"). Both gas contracts expire May 31, 1999.
Gross Margin
A comparison of the gross margins earned by the Company's natural gas
marketing and transmission segment is as follows:
<TABLE>
<CAPTION>
Lone Star MGNG Other
Contract Contract Contracts Consolidated
--------- -------- --------- ------------
<S> <C> <C> <C> <C>
Quarter Ended December 31, 1998
Gas Sales $19,042 $1,236 $177 $20,455
Gas purchases (11,231) (1,386) (329) (12,946)
------- ------ ---- -------
Gross margin $ 7,811 ($ 150) ($152) $ 7,509
======= ====== ==== =======
Quarter Ended December 31, 1997:
Gas Sales $19,013 $1,250 $20,263
Gas purchases (11,510) (1,576) (13,086)
------- ------ -------
Gross margin $ 7,503 ($ 326) $ 7,177
======= ====== =======
</TABLE>
-11-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Natural gas sales under the Lone Star Contract increased $29 or .2%
from the first quarter of fiscal 1998 to the first quarter of fiscal 1999. Under
the Lone Star Contract the price received for gas is essentially fixed through
May 31, 1999. The variance in gas sales, therefore, is almost entirely
attributable to the volumes of gas delivered. Although the volumes delivered to
Lone Star annually are essentially fixed (the Lone Star Contract has a
take-or-pay provision), the Lone Star Contract year is from February 1 to
January 31 whereas the Company's fiscal year is from October 1 to September 30.
Furthermore, although the volumes to be taken by Lone Star in a given contract
year are fixed, there is no provision requiring fixed monthly or daily volumes
and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such
variances have been significant. As a result, Lone Star deliveries, although
fixed for a contract year, may be skewed and not proportional for the Company's
fiscal periods.
For the first quarter of fiscal 1999 deliveries and sales to Lone Star
exceeded by approximately 17% those which would have resulted if daily
deliveries had been fixed and equal. Furthermore, the Company expects deliveries
and sales to Lone Star for the period January 1, 1999 to May 31, 1999 to exceed
by approximately 4% those which would result if daily deliveries were fixed and
equal.
Gas purchases for the Lone Star Contract decreased $279 or 2.4% from
the first quarter of fiscal 1998 to the first quarter of fiscal 1999. For the
quarter ended December 31, 1997 gas purchases comprised 60.5% of gas sales
versus 59% of gas sales for the quarter ended December 31, 1998. From 1998 to
1999 the gross margin increased $308 or 4.1%. During the same periods the gross
margin percentage ((gas sales - gas purchases) as a percentage of gas sales)
increased 1.5% from 39.5% for the quarter ended December 31, 1997 to 41% for the
quarter ended December 31, 1998. The decrease in gas purchases as a percentage
of gas sales and resulting increase in the gross margin percentage resulted
primarily from decreased gas purchase costs applicable to gas supplies that the
Company purchased at spot prices and which were not provided by the Company's
fixed price gas supply contract with MGNG.
MGNG Contract
One of the Company's subsidiaries is a party to the MGNG Contract.
Pursuant to the terms of this contract, the subsidiary is required to sell to
MGNG 7,356,000 MMBtu's (British thermal units) of natural gas at a fixed price
ratably over the period from June 1, 1996 to May 31, 1999. The fixed price for
the gas sold to MGNG is significantly less than the fixed price of gas sold to
Lone Star. For the quarter ended December 31, 1998, the Company realized a
negative gross margin of $150 versus a negative gross margin of $326 for the
quarter ending December 31, 1997. The negative margins resulted because the spot
(market) prices paid by the Company for gas, less hedging adjustments where
applicable, exceeded the fixed price received by the Company from MGNG under the
contract. The decrease in negative gross margins for the quarter ended December
31, 1998 resulted because the spot prices paid by the Company, net of hedging
effects, were lower in fiscal 1999 than in fiscal 1998. The Company has hedged
all of its remaining gas purchase requirements for this contract. As a result,
the Company expects to realize a significant negative gross margin on this
contract during its remaining term, January 1, 1999 to May 31, 1999.
-12-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Other Contracts
The $152 negative gross margin from other contracts for the quarter
ended December 31, 1998 resulted because one of the Company's subsidiaries was
required to sell excess deliveries to Lone Star at very low spot prices, whereas
the Company's costs to acquire the required gas volumes were at significantly
higher fixed prices. There were no similar contracts in effect during the
quarter ended December 31, 1997. The effect of other contracts is not expected
to be material in the future.
General and Administrative
General and administrative costs increased $63 from $26 for the three
months ended December 31, 1997 to $89 for the three months ended December 31,
1998. The increase was attributable to increased legal costs and increased
consulting fees for on-going gas marketing operations.
Transportation
Transportation expense decreased $1 from $460 for the three months
ended December 31, 1997 to $459 for the three months ended December 31, 1998.
Transportation expense is based upon and thus proportional to deliveries made to
Lone Star and represents the amortization of a $3,000 prepaid transportation
asset received by one of the Company's subsidiaries in the sale of the Castle
Pipeline to Union Pacific Resources Company ("UPRC") in May 1997. Deliveries to
Lone Star were approximately the same in each of the quarters ended December 31,
1998 and 1997.
EXPLORATION AND PRODUCTION
Revenues
Oil and Gas Sales
Oil and gas sales decreased $267 or 40.6% from the first quarter of
fiscal 1998 to the first quarter of fiscal 1999. Approximately $154 of the
decrease is due to decreased production. The remaining $113 is due to decreased
prices received for oil and gas. Oil prices have been at or near record lows for
much of the quarter ended December 31, 1998. Gas prices, although not as low as
oil prices, have been approximately 23% lower during the quarter ended December
31, 1998 than during the quarter ended December 31, 1997. Although the Company
is currently participating in a drilling joint venture and pursuing additional
investments in drilling ventures and oil and gas property acquisitions, the
Company may decide to curtail or reduce drilling given the current low spot
prices for oil and gas.
Well Operations
Revenue from well operations increased $32 or 55.2% from the first
quarter of fiscal 1998 to the first quarter of fiscal 1999. The increase was
caused by the non-recurring recovery of operating fees in 1999 that had been
written off in prior years.
-13-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Expenses
Oil and Gas Production
Oil and gas production expenses increased $29 or 17.6% from the first
quarter of fiscal 1998 to the first quarter of fiscal 1999. The increase in oil
and gas production expenses results from the general maturing of the Company's
oil and gas properties and the tendency for older, depleting properties to carry
a higher production expense burden than recently drilled properties.
Furthermore, oil and gas production expenses, especially repairs, do not
generally occur evenly throughout the year and are best compared on an annual
rather than on a quarterly basis.
General and Administration
General and administrative costs increased $25 or 11.3% from the first
quarter of fiscal 1998 to the first quarter of fiscal 1999. The increase was
primarily attributable to increased employee salaries in fiscal 1999.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $96 or 58.9% from
the first quarter of fiscal 1998 to the first quarter of fiscal 1999. The
decrease is primarily attributable to decreased production.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE
Corporate general and administrative expenses increased $373 or 50.4%
from the first quarter of fiscal 1998 to the first quarter of fiscal 1999. Most
of the increase was caused by increased consulting fees resulting from due
diligence on possible acquisitions. Additional factors causing the increase are
employee bonuses and increased legal costs.
OTHER INCOME (EXPENSE)
Interest Income
Interest income decreased $170 or 26.7% from the first quarter of
fiscal 1998 to the first quarter of fiscal 1999. The decrease is primarily
attributable to a decrease in unrestricted cash. At December 31, 1998, the
Company had $40,447 of unrestricted cash versus $51,490 of unrestricted cash a
year earlier.
TAX PROVISION
The tax provisions for each of the quarters ended December 31, 1998 and
1997 essentially represent the amortization of the Company's deferred tax assets
at an effective rate of 36% of pre-tax book income. The Company expects to
record a similar tax provision for future earnings through amortization of the
deferred tax asset. At December 31, 1998 such deferred tax asset aggregated
-14-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
$1,431. If future events change the Company's estimate concerning the
probability of utilizing its tax assets, appropriate adjustments will be made
when such a conclusion is reached.
LIQUIDITY AND CAPITAL RESOURCES
All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward-looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report, including without limitation in conjunction with the expected cash
receipts and expected cash obligations included below. All forward-looking
statements in this report are expressly qualified in their entirety by the
cautionary statements in this section.
During the quarter ended December 31, 1998, the Company generated
$4,505 from operating activities. During the same period the Company invested
$186 in oil and gas drilling and paid $443 in stockholder dividends. At December
31, 1998, the Company had $40,447 of unrestricted cash, $44,593 of working
capital and no long-term debt.
At the present time the probable future cash expenditures of the
Company consist of the following:
a. Investments in Oil and Gas Properties and Energy Sector - the
Company is currently pursuing several possible material investments
in the energy sector. These possible investments include drilling
ventures, the acquisition of oil and gas properties and oil and gas
companies, as well as the acquisition of pipelines and gas marketing
transactions. Although most of these possible investments involve
domestic properties, some involve foreign properties. In addition,
the Company still plans to drill up to 70 more wells over the next
two to three years as part of its Appalachian drilling joint venture
with another oil and gas operator, although the current low prices
for gas may cause the Company to curtail such effort. Although the
Company believes that the recent significant decreases in oil and
gas prices increases the probability that the Company will conclude
a transaction or several transactions on terms favorable to the
Company, there can be no assurance that such will be the case.
Several large oil and gas companies have significantly more
resources than the Company and other parties may be willing to pay
more than the Company for a given acquisition.
b. Repurchase of Company Shares - as of February 10, 1999, the Company
had repurchased 3,862,917 of its shares of common stock at a cost of
$53,807. The Company's Board of Directors had previously authorized
the repurchase of up to 4,250,000 shares to provide an exit vehicle
for investors who want to liquidate their investment in the Company.
The decision whether to repurchase additional shares will depend
upon the market price of the Company's stock, tax considerations,
the number of stockholders seeking to sell their shares and other
factors.
c. Recurring Dividends - the Company's Board of Directors adopted a
policy of paying a $.60 per share annual dividend ($.15 per share
quarterly) in June of 1997. The Company expects to continue to pay
such dividend until the Board of Directors, in its sole discretion,
changes such policy.
-15-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
An estimate of the Company's expected cash resources and obligations
from January 1, 1999 to September 30, 1999, the fiscal year end during which the
Lone Star Contract expires, is as follows:
<TABLE>
<CAPTION>
Expected Cash Resources: ("000's" Omitted)
<S> <C>
Cash on hand - January 1, 1999...................................... $40,447
Cash flow - gas marketing and remaining exploration and
production operations............................................. 11,763
Repayment of Penn Octane Corporation note........................... 1,000
Proceeds from SWAP litigation - IRLP................................ 704
Proceeds from American Western note................................. 800
Interest............................................................ 1,763
Proceeds from MGNG Contract litigation.............................. 750
-------
57,227
-------
Expected Cash Obligations:
New drilling........................................................ 1,601
Quarterly dividends paid in January 1999............................ 441
Quarterly dividends (based on outstanding shares at February 10,
1999 to be paid in April and July 1999)........................... 882
Assumed IRLP payment of vendors and funding of
environmental reserves............................................. 1,550
Legal defense costs - environmental litigation...................... 200
-------
4,674
-------
Excess of Expected Cash Resources Over Expected Cash
Obligations......................................................... $52,553
=======
</TABLE>
The foregoing estimates assume that the Company's operations and
expected cash flow will not be affected by any of the risk factors listed below:
a. Contingent environmental liabilities
b. Vendor liabilities of the Company's inactive refining subsidiaries
c. Litigation
d. Credit risk - Lone Star
e. Supply risk - MGNG
f. Price risk - gas supply
g. Gas contract litigation - Lone Star and/or MGNG
h. Public market for Company's stock
i. Future of the Company
j. Other risks including general business risks, insurance claims
against the Company in excess of insurance recoveries, tax
liabilities resulting from tax audits, drilling risks and litigation
risk.
-16-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
The Company has recently completed a study of the Year 2000 issue and
related risks. As a result of the study, the Company has replaced its oil and
gas and general ledger software with new software which is Year 2000 compliant.
The Company expects the cost to approximate $100. At December 31, 1998, $90 had
been incurred. The Company commenced using the new software in the first quarter
of fiscal 1999. The Company has also made inquiries to outside parties who
process transactions of the Company, e.g., payroll, commercial banks, transfer
agent, reserve engineers, etc. While some outside parties have confirmed they
are Year 2000 compliant, others have not done so to the Company's satisfaction.
The Company is continuing to pursue the vendors whose responses appear to
provide insufficient assurance.
The most important systems operated by the Company are its revenue
distributions, joint interest billing and general ledger. The Company replaced
its software because the new systems are Year 2000 compliant. If a Year 2000
problem nevertheless occurred, the Company could process transactions for
several months manually or using small computers but only with increased
administrative costs. Nevertheless, in many cases, the Company is not the
operator of a given well or purchaser of oil and gas production. In those cases
the Company is dependent upon the operator and/or gas/oil purchaser for accurate
volumetric, cost and sales information and for payments. Although the Company
has made Year 2000 inquiries of such operators and purchasers and generally
received satisfactory responses, there can be no assurance that such operators
and purchasers will actually be Year 2000 compliant. If such is the case, the
Company could find a major portion of its production revenue held in escrow
until Year 2000 compliance was achieved or resulting litigation settled. The
related legal cost and resulting administrative confusion could be substantial.
The Company expects to make any necessary contingency plans in fiscal 1999 in
the event of non-compliance of its systems, customers or suppliers.
The Company and its subsidiaries are not aware of any material Year
2000 operational risks.
Readers should refer to the Management Discussion and Analysis of
Financial Condition and Results of Operations Section of the Company's Form 10-K
for the fiscal year ended September 30, 1998 for a description of the
aforementioned risk factors.
If any or several of these risks materialize, the Company's estimated
cash flow and results of operations will probably be adversely impacted and the
impact may be material. The estimated cash flow above assumes none of these
risks materializes. Given the number and variety of risks and the litigiousness
of today's corporate world, it is reasonably possible that one or more of these
risks may occur.
-17-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding lawsuits, reference is made to Item 3 of the
Company's Form 10-K (Annual Report) for the fiscal year ended September 30,
1998. Also see Note 4 to the December 31, 1998 financial statements included in
Part I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 10.125 - Rollover and Assignment Agreement, dated
December 1, 1998 between Penn Octane Corporation
and Certain Lenders, including Castle Energy
Corporation
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1999 CASTLE ENERGY CORPORATION
/s/Richard E. Staedtler
--------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-19-
<PAGE>
EXHIBIT 10.125
ROLLOVER AND ASSIGNMENT AGREEMENT
THIS ROLLOVER AND ASSIGNMENT AGREEMENT ("Rollover Agreement") is made
as of December 1, 1998 between Penn Octane Corporation, a Delaware corporation
having its principal office at 900 Veterans Boulevard, Suite 510, Redwood City,
California 94063 (the "Borrower") and the six Lenders set forth on Schedule I
hereto (each a "Lender", collectively, the "Lenders").
WHEREAS, pursuant to that certain Purchase Agreement dated October 21,
1997 (the "Purchase Agreement"), the Borrower issued to each Lender a promissory
note (with respect to each Lender, the "Original Note" and collectively, the
"Original Notes") bearing interest at the rate of 10% per annum, dated as of
October 21, 1997 in the aggregate principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000), pursuant to which the Borrower is obligated to
repay to each Lender the stated principal amount of such Lender's Original Note
(which amount is set forth opposite such Lender's name on Schedule I hereto)
plus any accrued and unpaid interest thereon at the rate of 10% per annum (such
amount with respect to each Lender, the "Loan");
WHEREAS, Borrower has represented to Lenders that: an arbitral award
was rendered against International Bank of Commerce-Brownsville ("IBC") in favor
of Borrower; the value of the arbitral award as of July 31, 1998 was
approximately $3.4 million; a judgment was entered on February 28, 1996 by the
197th District Court of Cameron County, Texas in Civil Action No. 94-08-4008-C,
known as International Energy Development Corp. v. International Bank of
Commerce-Brownsville; such judgment modified the arbitral award in certain
respects; an appeal was taken to the Court of Appeals for the Thirteenth
District of Texas (the "Corpus Christi Court of Appeals"); on June 18, 1998, the
Corpus Christi Court of Appeals rendered an Opinion and Order in No.
13-96-298-CV, known as International Bank of Commerce - Brownsville, Appellant
v. International Energy Development Corp., Appellee, such Opinion and Order
confirmed the original arbitral award in all respects; and IBC has filed a
motion for rehearing with the Corpus Christi Court of Appeals;
WHEREAS, the Borrower has requested each of the Lenders to continue to
lend the original principal amount of its respective Loan, and the Borrower
intends to effect the equitable distribution to the Lenders of any payment,
realization or proceeds relating to or arising out of the Judgment (as defined
in the Assignment);
WHEREAS, simultaneously upon the execution of this Rollover Agreement,
the Borrower and the Lenders have executed a Collateral Agreement substantially
in the form attached hereto as Exhibit A, and the Borrower and Castle Energy
Corporation for itself and as Collateral Agent for the Lenders have executed an
Assignment of Judgment Agreement substantially in the form attached hereto as
Exhibit B (respectively, the "Collateral Agreement" and the "Assignment")
pursuant to which (i) Castle Energy Corporation has been appointed as Collateral
Agent by the Borrower and Lenders (the "Collateral Agent"), and a collateral
account has been established by the Collateral Agent (the "Collateral Account");
(ii) Borrower has agreed to instruct IBC in writing (as attached as Annex 1 to
the Collateral Agreement, the "Payment Instruction Letter") to make any payment
of Proceeds (as defined in the Assignment) into the Collateral Account; and
(iii) Borrower has assigned in trust to the Collateral Agent as assignee for
itself and on behalf of all the Lenders all of Borrower's right, title and
interest in and to the Judgment (as defined in the Assignment) and the Proceeds;
and (iv) the Collateral Agent shall distribute any Proceeds paid into the
Collateral Account solely as set forth in the Collateral Agreement;
<PAGE>
WHEREAS, each of the Lenders has agreed to continue to lend the
original principal amounts of its respective Loan subject to the terms and
conditions of this Agreement, and to amend and restate its Original Note in
consideration for which the Borrower shall execute and deliver: (i) to the
Collateral Agent, the Assignment, (ii) to each Lender, an amended and restated
Original Note (with respect to each Lender, the "Amended Note", collectively,
the "Amended Notes") substantially in the form of Exhibit C hereto in such
principal amount as is set forth opposite such Lender's name on Schedule I
attached hereto, and (iii) to each Lender, warrants issued by the Borrower to
such Lender to purchase shares of Common Stock, $.01 par value ("Common Stock")
of the Borrower at an exercise price of $1.75 per share, pursuant to Section
2(c) hereof (the "Warrants", together with the Amended Notes, the "Securities"),
substantially in the form of Exhibit D hereto; and
WHEREAS, the Borrower and each of the Lenders desire to enter into a
Registration Rights Agreement with respect to the shares of Common Stock
underlying the Warrants (the "Warrant Shares") and the Conversion Shares (as
defined below), substantially in the form of Exhibit E hereto (the "Registration
Rights Agreement"), all on the terms and conditions set forth therein.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Continuation of Loans. Subject to the terms and conditions stated
herein, each Lender hereby agrees to continue to lend the original principal
amount of its respective Loan until the Maturity Date (as defined in this
Agreement).
2. Assignment.
a. In consideration of the Lenders' agreement to continue to lend
the original principal amount of their respective Loans subject to the
terms and conditions stated herein, the Borrower hereby (i) agrees to
execute and deliver to each of the Lenders at the Closing (as defined
below) an Amended Note in such amount as is set forth opposite such
Lender's name on Schedule I hereto and (ii) agrees to execute and
deliver to the Collateral Agent at the Closing the Assignment and (iii)
agrees to execute and deliver to the Lenders at the Closing the
Collateral Agreement. Borrower hereby acknowledges that the Assignment
and the Collateral Agreement are executed as collateral security and
the execution and delivery thereof shall not in any way impair or
diminish the obligations of Borrower to Lenders. Any Proceeds paid into
the Collateral Account shall be paid in trust to the Collateral Agent,
shall be subject to the liens of the Collateral Agent for the benefit
of itself and the Lenders, and shall be distributed by the Collateral
Agent in accordance with the terms and conditions of the Collateral
Agreement.
2
<PAGE>
b. Borrower hereby agrees to execute and deliver to the Collateral
Agent at the Closing the Payment Instruction Letter, in the form
attached hereto as Annex 1 to the Collateral Agreement which Collateral
Agent shall send to IBC.
c. In further consideration of the Lenders' agreement to continue
to lend the principal amount of their respective Loans subject to the
terms and conditions stated herein, the Borrower shall execute and
deliver to each Lender at the Closing, all Warrants to purchase shares
of Common Stock expiring three years from the date hereof with an
exercise price of $1.75 per share, in such numbers as are set forth
opposite such Lender's name on Schedule I hereto.
d. The number of Warrants to be issued to the Lenders at the
Closing pursuant to Section 3(c) is subject to adjustment as set forth
in Section 6 of each Warrant.
3. The Closing. The execution and delivery of this Rollover Agreement
shall take place on December 3, 1998, or at such other date as the Borrower and
the Lenders shall agree (the "Closing").
4. Amendment of the Original Notes. Each Lender hereby agrees that
upon delivery at the Closing by the Borrower of an Amended Note in such
principal amount set forth opposite such Lender's name on Schedule I hereto,
such Lender shall mark its Original Note "amended and restated"; and, the
Original Note shall be deemed to be amended and restated in its entirety by the
Amended Note.
5. Registration Rights. The Lenders shall have such registration
rights with respect to the Warrant Shares and the Conversion Shares as are set
forth in the Registration Rights Agreement.
6. Interest Rate; Default Interest Rate; Remedies. The Borrower and
each of the Lenders agree that the Amended Notes shall accrue interest at the
rate of ten percent (10%) per annum, payable on December 31, 1998, March 31 and
June 30, 1999 (or the Maturity Date if earlier). Upon the occurrence of any
Event of Default (as set forth in the Amended Note) under any one of the Amended
Notes, the indebtedness owing under each Amended Note shall become immediately
due and payable in full and shall accrue interest at the rate of twelve percent
(12%) per cent per annum until the entire remaining principal balance of each
Amended Note shall have been paid in full together with all interest accrued
thereon; and the holder of each Amended Note may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law.
3
<PAGE>
7. Maturity. All outstanding principal of, and accrued and unpaid
interest on, each Amended Note shall be due and payable on the earlier to occur
of any one of the following dates or events (the "Maturity Date"):
a. June 30, 1999;
b. a date determined by the Borrower within ten (10) business days
of the closing date of any raising of debt or equity financing of the
Borrower, resulting in net proceeds to the Borrower in excess of
$2,250,000; or
c. an Event of Default (as defined in the Amended Notes).
7A. Conversion of Indebtedness. Any outstanding principal and/or
accrued and unpaid interest which remains due and payable in respect of any
Amended Notes after June 30, 1999 (with respect to each Amended Note, the
"Overdue Indebtedness") shall, upon the written request (with respect to each
Amended Note, a "Conversion Notice") of the holder of such Amended Notes, be
converted by the Company, in whole but not in part, into such number of
newly-issued shares of Common Stock of the Company (with respect to each Amended
Note, the "Conversion Shares") equal to the quotient of the Overdue Indebtedness
at the time of receipt by the Company of the Conversion Notice divided by $1.50.
The Company hereby agrees to deliver any Conversion Shares to the relevant
holder of an Amended Note as soon as practicable after receipt of a Conversion
Notice and upon surrender of the Amended Note being so converted to the Company
by the holder thereof but in no event later than ten (10) business days after
receipt of the Conversion Notice (the "Issuance Deadline"). Upon the issuance of
the Conversion Shares in respect of an Amended Note, such Amended Note shall,
from the date of receipt by the Company of the Conversion Notice, cease to
accrue any interest, and all of the Company's obligations in respect of such
Amended Note shall be deemed satisfied in full upon the issuance and delivery to
the holder of such Amended Note of the Conversion Shares. In addition, any
Conversion Shares issued pursuant to this Agreement shall be entitled to the
registration rights provided for in the Registration Rights Agreement.
8. Pro Rata Payments. Any payment by the Borrower of any amounts under
the Amended Notes shall be made to each Lender pro rata in proportion to the
principal amount outstanding under such Lender's Amended Note over the total
amount outstanding under all the Amended Notes calculated as of the date of
payment. Each payment made by the Borrower relating to the Amended Notes shall
be applied first to accrued and unpaid interest on, and second to outstanding
principal of, the Amended Notes.
9. Representations, Warranties and Covenants of the Borrower. The
Borrower represents, warrants and covenants that as of the Closing, and at all
times thereafter until the Amended Notes are paid and satisfied in full:
a. The Borrower is and shall be a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, and has and will have the requisite corporate power and
authority to execute and deliver this Rollover Agreement and to perform
its obligations hereunder.
4
<PAGE>
b. The execution, delivery and performance of this Rollover
Agreement have been and will continue to be duly authorized by all
necessary corporate action on the part of the Borrower and do not
violate any covenant contained in any agreement to which the Borrower
is a party.
c. The Warrant Shares and the Conversion Shares, when issued upon
exercise of the Warrants and payment therefor or upon conversion of
Amended Notes, as the case may be, will be legally and validly issued,
fully paid and nonassessable.
d. The Borrower owns all right title and interest in and to the
Judgment and the Proceeds; and except as otherwise set forth in this
Rollover Agreement and the Collateral Agreement, the Borrower has not
created or suffered to exist and will not create or suffer to exist
with respect to the Judgment or the Proceeds any security interest,
pledge, assignment, encumbrance, lien (statutory or otherwise) or other
security agreement or preferential arrangement or transfer of any kind
or nature whatsoever.
e. The Borrower has not received any payment or Proceeds nor
realized all or any part of the Judgment; and if the Borrower hereafter
receives any payment or Proceeds or realizes all or any part of the
Judgment, it shall hold the same in trust for the benefit of the
Lenders and deliver the same to the Collateral Agent in the form
received immediately upon the Borrower's receipt thereof.
f. The Judgment has not been reversed, dismissed, modified or
vacated by any court; and the Borrower will notify the Lenders
immediately of any such reversal, dismissal, modification or vacation.
g. The Borrower will notify the Lenders immediately of any raising
of debt or equity financing that has or potentially may result in
proceeds to the Borrower in excess of $2,250,000, net of transaction
expenses related to such offering and any such excess shall be paid to
Lenders, pro rata, immediately upon Borrower's receipt thereof.
10. Representations and Warranties of the Lenders. Each of the Lenders,
severally and not jointly, represents and warrants to the Borrower, as to
itself, as follows:
5
<PAGE>
a. General:
(i) The Lender has all requisite authority to enter into this
Rollover Agreement and to perform all of the obligations required
to be performed by it hereunder.
(ii) Neither the Borrower nor any person acting on behalf of
the Borrower has offered or sold the Securities to the Lender by
means of any form of general solicitation or general advertising.
The Lender 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 Borrower: Solely for the purpose of
this Rollover Agreement and the Warrants, and not for any other purpose
whatsoever:
(i) The Lender is familiar with the business and financial
condition, properties, operations and prospects of the Borrower.
(ii) The Lender has been given full access to all material
information concerning the condition, properties, operations and
prospects of the Borrower. The Lender and its advisors (if any)
have had an opportunity to ask questions of, and to receive
information from, the Borrower and persons acting on its behalf
concerning the terms and conditions of the Lender's investment in
the Securities, and to obtain any additional information necessary
to verify the accuracy of the information and data received by the
Lender. The Lender is satisfied that there is no material
information concerning the condition, properties, operations and
prospects of the Borrower of which the Lender is unaware.
(iii) The Lender has made, either alone or together with its
advisors (if any), such independent investigation of the Borrower,
its management, and related matters as the Lender deems to be, or
the Lender's advisors (if any) have advised to be, necessary or
advisable in connection with this investment; and the Lender and
its advisors (if any) have received all information and data which
the Lender and its advisors (if any) believe to be necessary in
order to reach an informed decision as to the advisability of
investing in the Securities.
(iv) The Lender understands that all the Lender's
representations and warranties contained in this Rollover Agreement
will be deemed to have been reaffirmed and confirmed as of the
Closing.
(v) The Lender understands that acceptance of the Securities
involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Securities, the Warrant
Shares or the Conversion Shares and that resale of the Securities,
the Warrant Shares or the Conversion Shares will be restricted as
herein provided.
6
<PAGE>
c. Status of Lender:
(i) The Lender either alone or with its 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
Lender has deemed it appropriate to do so, the Lender has retained
and relied upon, appropriate professional advice regarding the
investment, tax and legal merits and consequences of this Rollover
Agreement and owning the Securities, the Warrant Shares and the
Conversion Shares, as the case may be.
d. Restrictions on Transfer or Sale:
(i) The Lender is acquiring the Securities and any Warrant
Shares purchased upon exercise of the Warrants or Conversion Shares
upon conversion of Amended Notes solely for its own account, for
investment purposes, and not with a view to, or for resale in
connection with, any distribution of the Amended Note, the Warrants
or such Warrant Shares or Conversion Shares. The Lender understands
that neither the Amended Note, the Warrants nor such underlying
Warrant Shares or Conversion Shares 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 Lender and on the other representations made by the Lender
in this Rollover Agreement. The Lender understands that the
Borrower is relying upon the representations and agreements
contained in this Rollover Agreement (and any supplemental
information) for the purpose of determining whether this
transaction meets the requirements for such exemptions.
(ii) The Lender understands that the Amended Note, the Warrants
and such underlying Warrant Shares and Conversion Shares 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 Lender 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
Borrower 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 Lender understands
that under the Commission's rules, unless disposed of pursuant to
an effective registration statement under the Securities Act, the
Lender may dispose of the Amended Note, Warrants, underlying
Warrant Shares and Conversion Shares 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, or pursuant to such other
exemptions as may be available in which event the transferee will
acquire "restricted securities" subject to the same limitations as
in the hands of the Lender. As a consequence, absent such an
effective registration statement under the Securities Act, the
Lender understands that it may be required to bear the economic
risks of the investment in the Securities (and the underlying
Warrant Shares and Conversion Shares) for an indefinite period of
time.
7
<PAGE>
(iii) The Lender agrees that (a) it will not sell, assign,
pledge, give, transfer, of otherwise dispose of the Amended Note,
the Warrants or such underlying Warrant Shares or Conversion Shares
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 Lender satisfactory to the Borrower (which
requirement may be waived by the Borrower upon advice of counsel),
is exempt from the registration provisions of the Securities Act
and any applicable State Securities Laws; (b) the Amended Note and
the Warrants and any certificate(s) representing shares of Common
Stock issued upon exercise of the Warrants may bear a legend making
reference to the foregoing restrictions; and (c) the Borrower and
any transfer agent for shares of its Common Stock shall not be
required to give effect to any purported transfer of any of such
securities except upon compliance with the foregoing restrictions.
(iv) The registration rights granted to the Lender in the
Registration Rights Agreement are not assignable or otherwise
transferrable by the Lender except for assignment to affiliates
and/or subsidiaries of the Lenders. In no event shall any sale,
assignment, pledge or transfer of the Warrants, Warrant Shares or
Conversion Shares by the Lender to a transferee give rise to any
rights under the Registration Rights Agreement except for
assignment to affiliates and/or subsidiaries of the Lenders.
11. Conditions to Obligations of Lender and the Borrower. The
obligations of each of the Lenders and the Borrower under this
Rollover Agreement are subject to the satisfaction at or prior to
the Closing of the following conditions precedent:
a. The representations and warranties of the Borrower contained in
Section 9 hereof and of each Lender contained in Section 10 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.
8
<PAGE>
b. The Borrower and the Lenders shall have executed and delivered
the Registration Rights Agreement.
c. Each Lender shall have received a duly executed Amended Note in
such principal amount set forth opposite such Lender's name on Schedule
I hereto.
d. The Borrower and the Lenders shall have executed and delivered
the Collateral Agreement.
e. The Borrower and the Collateral Agent shall have executed and
delivered the Assignment.
f. The Borrower shall have executed and delivered to the Lenders
with respect to the Judgment and the Proceeds such documentation as
Lenders and any of their respective legal counsel may require to effect
or perfect the assignment of and security interests in the Judgment,
including, without limitation, UCC-1 Financing Statements.
g. No Event of Default (as defined in the Amended Notes) shall have
occurred.
12. Waiver, Amendment. Neither this Rollover Agreement, the Collateral
Agreement, the Amended Notes, the Assignment nor any provisions hereof or
thereof 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.
13. Assignability. Except as otherwise provided in this Rollover
Agreement and the Collateral Agreement, neither this Rollover Agreement nor any
right, remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by either the Borrower or any Lender hereunder without the
prior written consent of the other party, which consent shall not be
unreasonably withheld, except for Assignments to affiliates and/or subsidiaries
of Lender.
14. Applicable Law. This Rollover 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.
15. Submission to Jurisdiction. The Borrower and each Lender hereby
irrevocably agrees that any legal action or proceedings brought against it or
any of its property with respect to this Rollover Agreement or the Amended Notes
may be brought in any state or Federal court located in the City of New York, or
both, and by execution and delivery of this Rollover Agreement each hereby
submits to and accepts with regard to any such action or proceeding, for itself
and in respect of its property, generally and unconditionally, the jurisdiction
of the aforesaid courts. The Borrower and each Lender irrevocably consents to
the service of process in any such action or proceeding by the mailing of copies
thereof by registered or certified airmail, postage prepaid, to the Borrower at
its address set forth in Section 19.
9
<PAGE>
16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY UNDER OR IN
CONNECTION WITH THIS ROLLOVER AGREEMENT OR THE AMENDED NOTES.
17. Section and Other Headings. The section and other headings
contained in this Rollover Agreement are for reference purposes only and shall
not affect the meaning or interpretation of this Rollover Agreement.
18. Counterparts. This Rollover 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.
19. 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. To the Borrower:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
b. If to a Lender, at the address set forth beneath such Lender's
name on Schedule I hereto; or at such other address as any party shall have
specified by notice in writing to the other parties.
20. Binding Effect. The provisions of this Rollover Agreement shall be
binding upon and accrue to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns.
21. Severability. Any provision in this Rollover Agreement that is held
to 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 Rollover Agreement are declared to be several.
10
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
PENN OCTANE CORPORATION
By: /s/Jerome B. Richter
----------------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
11
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
CASTLE ENERGY CORPORATION
By: /s/Richard E. Staedtler
-------------------------------
Name: Richard E. Staedtler
Title: Chief Financial Officer
12
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
/s/ Clint Norton
----------------------------------
Clint Norton
SOUTHWEST CONCEPT INC.
By: /s/ Clint C. Norton
-------------------------------
Name: Clint C. Norton
Title:
13
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
/s/ James F. Meara, Jr.
----------------------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: /s/James F. Meara, Jr.
-------------------------------------
Name: James F. Meara, Jr.
Title:
14
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 1st day of December, 1998.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By: /s/ Perry D. Snavely
-------------------------------------
/s/ Tamara Y. Armur
-------------------------------------
Name: Perry D. Snavely
Tamara Y. Armur
Title: Manager
15
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
<S> <C>
Castle Energy Corporation Principal amount of promissory note: $1,000,000
c/o CEC, Inc.
One Radnor Corporate Center Warrants: 225,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher LLP
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
</TABLE>
1
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
<S> <C>
Clint Norton Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 20,250
(972) 931-8509
Southwest Concept Inc. Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 13,500
Attn: Clint Norton
(972) 931-8509
</TABLE>
2
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
<S> <C>
James F. Meara, Jr. Principal amount of promissory note: $75,000
8150 N. Central Expressway, #795
Dallas, Texas 75206 Warrants: 16,875
(214) 692-7066
Donaldson Lufkin Jenrette Principal amount of promissory note: $75,000
Securities Corporation Custodian
SEP FBO James F. Meara IRA Warrants: 16,875
Pershing Division of Donaldson Lufkin &
Jenrette Securities Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
</TABLE>
3
<PAGE>
SCHEDULE I
Lenders and Addresses
Lincoln Trust Company Principal amount of promissory note: $200,000
FBO Perry D. Snavely IRA
P.O. Box 5831 Warrants: 45,000
Denver, Colorado 80217
Attn: Monique Rice
(610) 260-6388
4
<PAGE>
Exhibit A
---------
COLLATERAL AGREEMENT
--------------------
<PAGE>
Exhibit A
---------
COLLATERAL AGREEMENT
--------------------
THIS COLLATERAL AGREEMENT ("Collateral Agreement") is entered into this
1st day of December 1998, by and among (i) Penn Octane Corporation, a Delaware
corporation, (the "Borrower"); (ii) each of the individual lenders identified on
the signature pages hereto (each a "Lender", and collectively, the "Lenders");
and Castle Energy Corporation, as collateral agent (the "Collateral Agent").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Borrower has represented to Lenders that: an arbitral award
was rendered against International Bank of Commerce-Brownsville ("IBC") in favor
of Borrower; the value of the arbitral award as of July 31, 1998 was
approximately $3.4 million; a judgment was entered on February 28, 1996 by the
197th District Court of Cameron County, Texas in Civil Action No. 94-08-4008-C,
known as International Energy Development Corp. v. International Bank of
Commerce-Brownsville; such judgment modified the arbitral award in certain
respects; an appeal was taken to the Court of Appeals for the Thirteenth
District of Texas (the "Corpus Christi Court of Appeals"); on June 18, 1998, the
Corpus Christi Court of Appeals rendered an Opinion and Order in No.
13-96-298-CV, known as International Bank of Commerce - Brownsville, Appellant
v. International Energy Development Corp., Appellee, such Opinion and Order
confirmed the original arbitral award in all respects; and IBC has filed a
motion for rehearing with the Corps Christi Court of Appeals;
WHEREAS, Borrower has represented to Lenders that International Energy
Development Corp. changed its name to Penn Octane Corporation but the caption of
the Judgment (as defined in the Assignment) continues to reflect the prior name.
WHEREAS, pursuant to a Rollover and Assignment Agreement by and among
the Borrower and the Lenders of even date herewith ("Rollover Agreement") and an
Assignment of Judgment Agreement between Borrower and Castle Energy Corporation
for itself and as Collateral Agent for Lenders dated as of even date herewith
(the "Assignment") the Borrower has assigned in trust to Castle Energy
Corporation for itself and as Collateral Agent for the Lenders all of its right,
title and interest in and to the Judgment and the Proceeds (as defined in the
Assignment);
WHEREAS, in furtherance of the Assignment, the Borrower has agreed to
execute and deliver to Collateral Agent at Closing (as defined in the Rollover
Agreement) a letter to IBC, substantially in the form attached hereto as Annex 1
(the "Payment Instruction Letter") instructing IBC to deliver the Proceeds in
trust to the Collateral Agent for deposit in the Collateral Account (as
hereinafter defined);
WHEREAS, the Borrower and the Lenders wish to appoint the Collateral
Agent, and the Collateral Agent has agreed to establish a deposit account in
trust (the "Collateral Account") and to act, as an administrator of the
Collateral Account upon the terms, conditions and provisions hereinafter set
forth; and
<PAGE>
WHEREAS, the Borrower and the Lenders desire to set forth the terms and
conditions pursuant to which the Collateral Agent shall pay out any Proceeds
delivered to the Collateral Agent and/or deposited into the Collateral Account
during the term of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, it is hereby agreed among the parties hereto as follows:
1. Defined Terms
-------------
All capitalized terms used herein, unless otherwise defined herein,
shall have the respective meanings ascribed to them in the Rollover Agreement
and are incorporated herein by reference.
2. Appointment of the Collateral Agent
-----------------------------------
2.1 The Borrower and the Lenders hereby designate the Collateral
Agent, and the Collateral Agent hereby agrees to act, as an administrator of the
Collateral Account in trust, upon the terms and conditions set forth herein.
2.2 The Collateral Agent's duties and responsibilities, in its
capacity as such, shall be limited to those expressly set forth in this
Collateral Agreement, and the Collateral Agent shall not be subject to, nor
obliged to recognize, any other agreement between any or all of the parties
hereto even though reference thereto may be made herein, except to the extent
that definitions contained in the Rollover Agreement are incorporated in this
Collateral Agreement. This Collateral Agreement may not be amended at any time
in such a way as to affect the rights, responsibilities, obligations,
liabilities or fees of the Collateral Agent except with the Collateral Agent's
prior written consent, as evidenced by an instrument in writing signed by all
the parties hereto.
2.3 The Collateral Agent, in its capacity as such, shall disregard
any and all notices or directions given by any of the Borrower, the Lenders or
by any other person, firm or corporation, except (i) such notices, directions
and instructions as are specifically provided for herein, (ii) joint
instructions received in writing from the Borrower and the Lenders and (iii) a
Final Order (as hereinafter defined) of a court of competent jurisdiction. If
any property subject hereto is at any time attached, garnished or levied upon
under a Final Order of a court of competent jurisdiction, or in case the
payment, assignment, transfer, conveyance or delivery of any such property shall
be stayed or enjoined by a Final Order of a court of competent jurisdiction, or
in case a Final Order of a court of competent jurisdiction shall be made or
entered affecting such property or any part thereof, then and in any of such
events the Collateral Agent is authorized to rely upon and comply with any such
order, writ, judgment or decree of any court which is not subject to further
review or appeal (a "Final Order").
2.4 In the event that the Collateral Agent shall be uncertain as to
its duties or actions hereunder, or shall receive instructions from the Borrower
or the Lenders which, in the opinion of the Collateral Agent, are in conflict
with any of the provisions of this Collateral Agreement, it shall
2
<PAGE>
be entitled to maintain the Collateral Account and may decline to take any
further action until the Collateral Agent receives joint written instructions
from the Borrower and the Lenders directing the disbursement of all or any
portion of such Collateral Account, in which case the Collateral Agent shall
then make such disbursement in accordance with such instructions. Should any
dispute arise with respect to the payment, ownership or right of possession of
any proposed disbursement, the Collateral Agent is authorized and directed to
retain in its possession, without liability to anyone, all or any part of such
proposed disbursement until such dispute shall have been settled either by
mutual agreement of the parties concerned or by a Final Order, provided that the
Collateral Agent shall be under no duty whatsoever to institute or defend any
such proceedings, and, provided further, that if any such dispute continues for
more than one hundred twenty (120) days, the Collateral Agent may, in its
discretion, upon written notice to the Borrower and the Lenders, interplead the
Collateral Account (or that portion thereof which is the subject of such
dispute) to a court of competent jurisdiction (subject to the provisions of
Section 7.4 hereof).
2.5 It is understood and agreed that the Collateral Agent shall:
(a) be under no duty to accept notices or instructions from any
person other than as expressly provided for in this Collateral
Agreement;
(b) be protected in acting upon any notice, opinion, request,
certificate, approval, consent or other document reasonably believed by
it to be genuine and what it purports to be;
(c) be deemed conclusively to have given and delivered any
notice required to be given or delivered hereunder if the same is in
writing, signed by any one of its authorized officers and (i) mailed,
by registered or certified mail, return receipt requested, postage
prepaid, (ii) sent via expedited courier service that regularly
requires signed receipts evidencing delivery, or (iii) hand delivered,
in a sealed wrapper, manually receipted for by the addressee, in each
case to the Borrower or the Lenders at the addresses set forth in
Section 7.3 hereof;
(d) be protected, indemnified and held harmless jointly and
severally by the Borrower and the Lenders (other than Castle Energy
Corporation) from and against any claim made against it by reason of
its acting or failing to act in connection with any of the transactions
contemplated hereby and against any loss, liability or expense,
including attorneys' fees and other reasonable expenses of defending
itself against any claim of liability it may sustain in carrying out
the terms of this Collateral Agreement, except for claims which are
successfully asserted against the Collateral Agent based upon the
Collateral Agent's failure to comply with the terms and conditions of
this Collateral Agreement or the bad faith, gross negligence or willful
misconduct of the Collateral Agent; provided, however, that (i)
promptly after the receipt by the Collateral Agent of notice of any
demand or claim or the commencement of any such action, suit or
proceeding, the Collateral Agent shall notify all parties hereto in
writing of the existence of such demand, claim, action, suit or
proceeding; (ii) the other parties hereto shall be entitled, jointly or
severally and at their own expense, to participate in and assume the
defense of any such action, suit or proceeding; and (iii) the
3
<PAGE>
aforesaid indemnity obligations shall survive the termination of this
Collateral Agreement or the resignation of the Collateral Agent;
(e) have no liability in respect of or duty to inquire into the
terms and conditions of the Rollover Agreement (except to the extent
that any of the defined terms contained in the Rollover Agreement are
incorporated in this Collateral Agreement) or any other document or
agreement executed in connection with or pursuant to the Rollover
Agreement, its duties under this Collateral Agreement being understood
by the parties to be ministerial in nature;
(f) be permitted to consult with counsel of its choice which is
experienced in legal matters of a nature similar to those arising under
this Collateral Agreement, and shall not be liable for any action
taken, suffered or omitted by it in good faith in accordance with the
advice of such counsel; provided, however, that nothing contained in
this subsection (f), nor any action taken by the Collateral Agent or by
such counsel, shall relieve the Collateral Agent from liability for any
claims which are occasioned by its failure to comply with the terms and
conditions of this Collateral Agreement or the bad faith, gross
negligence or willful misconduct of the Collateral Agent, as provided
in subparagraph (d) above;
(g) not be bound by any modification, amendment, termination,
cancellation, rescission or supersession of this Collateral Agreement,
unless the same shall be in writing and signed by the Borrower and each
of the Lenders and notice thereof is provided to the Collateral Agent,
except to the extent that any such modification, amendment,
termination, cancellation, rescission or supersession affects the
rights, responsibilities, obligations, liabilities or fees of the
Collateral Agent hereunder, in which case any document or instrument
reflecting such changes shall also be signed by the Collateral Agent;
(h) be entitled to refrain from taking any action other than to
keep the Proceeds received by it in escrow until disbursement thereof
pursuant to Section 4.1 of this Agreement, or it shall be directed
otherwise in writing by the Borrower and the Lenders, or by a Final
Order; and
(i) be granted a security interest in and lien on the
Collateral Account for the benefit of itself and the Lenders in its
capacity as Collateral Agent hereunder. This paragraph shall survive
notwithstanding any termination of this Collateral Agreement or the
resignation of the Collateral Agent.
2.6 From time to time on or after the date hereof, the Borrower and
the Lenders shall deliver or cause to be delivered to the Collateral Agent such
further documents and instruments, or cause to be done such further acts, as the
Collateral Agent may request in order to enable the Collateral Agent to carry
out more effectively the provisions and purposes of this Collateral Agreement,
to evidence compliance with this Collateral Agreement or to assure itself that
it is reasonably protected in acting under this Collateral Agreement.
4
<PAGE>
2.7 (a) For its services hereunder, the Collateral Agent shall be
entitled to be paid by the Borrower a one-time acceptance fee in an amount equal
to One Dollar ($1.00), payable in advance, commencing with the execution of this
Collateral Agreement.
(b) The foregoing fee, together with the reasonable
out-of-pocket expenses incurred by the Collateral Agent in performing
its duties under this Collateral Agreement, shall be borne by the
Borrower. The Borrower hereby agrees to indemnify and hold the Lenders
harmless, from and against all losses or damages arising out of a
breach by the Borrower of its obligations under this Section 2.7.
3. Establishment of Collateral Account
-----------------------------------
3.1 Simultaneously with the execution of this Collateral Agreement,
the Borrower will deliver to the Collateral Agent Ten Dollars ($10.00) which is
to be deposited into a separate interest bearing deposit account in the name of
the Collateral Agent as the sole signatory (as so constituted and as the amount
of such Collateral Account may increase or be supplemented by any Proceeds or
interest thereon or pursuant to the Payment Instruction Letter or pursuant to
the provisions hereof, the "Collateral Account"). Collateral Agent shall
disburse funds from the Collateral Account in accordance with the terms of this
Collateral Agreement. Borrower agrees to execute, deliver and cause to be filed
any and all documents that may be required to evidence, perfect or continue the
perfection of the Collateral Agent's security interest in and lien on the
Collateral Account and the funds therein.
4. Disposition of Collateral Account
---------------------------------
4.1 As promptly as possible after the deposit and clearance of any
Proceeds into the Collateral Account pursuant to the Payment Instruction Letter,
the Collateral Agent shall disburse such Proceeds from the Collateral Account,
in the following amounts and according to the following priority:
(a) First, to the law firm of Patton Boggs, L.L.P. ("Patton
Boggs") for fees and expenses incurred in connection with the Judgment,
a particular amount not to exceed One Million Two Hundred Thousand
Dollars ($1,200,000.00) as such particular amount shall be directed by
the Borrower in writing to the Collateral Agent (the "Patton Boggs
Payment");
(b) Second, to Thomas A. Serleth, an amount equal to five
percent (5%) of the Judgment net of the Patton Boggs Payment, as such
amount shall be directed by the Borrower in writing to the Collateral
Agent;
(c) Third, to Castle Energy Corporation for payment of its
legal fees, costs and expenses (which Borrower hereby agrees to pay)
incurred in connection with the negotiation, preparation, documentation
of and/or exercise of rights under the Rollover Agreement, this
Collateral Agreement, the Assignment, the Amended Notes, the Warrants
and the Registration Rights Agreement provided, however, that the
amount so paid in connection with such negotiation, preparation and/or
documentation shall not exceed $30,000.
5
<PAGE>
(d) Fourth, to each of the Lenders in the respective principal
amounts set forth on Schedule I hereto plus all interest accrued
thereon as provided in each Lender's Amended Note; provided that if the
Proceeds are not sufficient to pay the Loans in full, then pro rata to
each of the Lenders based upon the outstanding amount of their
respective Loans at the time of payment;
(e) Fifth, to the Collateral Agent, any amounts owing to the
Collateral Agent pursuant to this Collateral Agreement other than as
specified in subsection (c) above; and
(f) Sixth, to the Borrower, such amount as is remaining in the
Collateral Account after payment in full of each Lender's Amended Note
and amounts owing under Sections 4.1 hereof or as otherwise provided in
this Collateral Agreement (the "Termination Date Escrow Balance").
4.2 The Collateral Agent shall provide written notice pursuant to
Section 7.3 hereof to each of the Lenders and the Borrower of the amount, date
and payee of any distributions to be made hereunder at least ten (10) days
before making any such disbursement pursuant to Section 4.1. For purposes of the
ten-day notice periods pursuant to this Section 4.2, each such period shall
commence on the date of such notice and shall terminate at midnight on the tenth
day thereafter.
4.3 The party or parties receiving a disbursement from the Collateral
Account shall, upon request, furnish to the Collateral Agent concurrently with
its receipt of such disbursement, a signed receipt for the amount of such
disbursement and, if applicable, documentary evidence reasonably satisfactory to
the Collateral Agent of such party's appointment, incumbency and authority.
4.4 For purposes of determining the amount of interest owing to any
Lender, the Collateral Agent shall be entitled to rely on a copy of the Amended
Note and a sworn affidavit signed by the Borrower and such Lender.
5. Lenders' Rights
---------------
The Borrower and each of the Lenders hereby acknowledge that neither
this Collateral Agreement nor the Assignment shall in any way prejudice any of
the Lenders' rights to payment under the Rollover Agreement or the Amended
Notes, or any other amounts owing pursuant to any other agreement, note, or
arrangement by and among any of the Borrower and the Lenders, as the case may
be, whatsoever. The Borrower specifically acknowledges that this Collateral
Agreement has been established for purposes of effecting the equitable
distribution of any Proceeds, and that this Collateral Agreement shall not be
construed in any way as a settlement, compromise or adjustment by any of the
Lenders of any amounts owed to them by the Borrower. The Borrower hereby
confirms, and the parties hereto acknowledge, the Borrower's assignment to the
Collateral Agent for the benefit of itself and the Lenders of all of Borrower's
right, title and interest in and to the Judgment and the Proceeds.
6
<PAGE>
6. Term
----
This Collateral Agreement shall continue until the earlier of (i) the
payment in full of all amounts owing to the Lenders under the Amended Notes, and
(ii) payment into and disbursement out of the Collateral Account, in accordance
with the terms of this Collateral Agreement, of all Proceeds; in each case, as
evidenced by written notice to such effect signed by each of the Lenders in the
form requested by the Collateral Agent; whereupon this Collateral Agreement and
the collateral arrangements created hereunder shall terminate (the "Termination
Date"), and the Collateral Agent shall be released and discharged from all
further duties and obligations hereunder, but without prejudice to any liability
of the Collateral Agent for its failure to comply with the terms and conditions
of this Collateral Agreement or its bad faith, gross negligence or willful
misconduct hereunder. Each of the Lenders agrees that, upon the occurrence of
either of the events specified in clause (i) or (ii) of this Section 6, such
Lender shall execute a written notice in the form requested by the Collateral
Agent.
7. Miscellaneous
-------------
7.1 (a) The Borrower and the Lenders may, upon at least thirty (30)
days' prior written notice to the Collateral Agent executed by all of them,
dismiss the Collateral Agent hereunder and appoint a successor. In such event,
the Collateral Agent shall promptly account for and deliver to the successor
collateral agent named in such notice the then balance of the Collateral
Account. Upon acceptance thereof and of such accounting by such successor
collateral agent, and upon reimbursement to the Collateral Agent of all expenses
due to it hereunder through the date of such accounting and delivery, the
Collateral Agent, in its capacity as such, shall be released and discharged from
all of its duties and obligations hereunder, but without prejudice to any
liability of the Collateral Agent for failure to comply with the terms and
conditions of this Collateral Agreement or its bad faith, gross negligence or
willful misconduct hereunder.
(b) (i) Without limiting the foregoing, the Collateral Agent
(and any successor collateral agent hereunder) shall have the right, as
provided in Subsection (ii) below, at any time to resign as such by
delivering the Collateral Account to any successor collateral agent
jointly designated by the Borrower and all Lenders in writing, or to
any court of competent jurisdiction, whereupon the Collateral Agent
shall be discharged of and from any and all further obligations arising
in connection with this Collateral Agreement, but without prejudice to
any liability of the Collateral Agent for its bad faith, gross
negligence or willful misconduct hereunder.
(ii) The resignation of the Collateral Agent will take
effect upon the appointment of a successor collateral agent by
the Borrower and all Lenders and delivery of the Collateral Account to
such successor.
7.2 This Collateral Agreement shall inure to the benefit of, and
shall be binding upon, the parties hereto and their respective successors,
heirs, remaindermen, assigns, executors, administrators, personal
representatives, trustees and fiduciaries. The Collateral Agent shall have the
right to rely upon any proper evidence of the authority of any such successors,
heirs,
7
<PAGE>
remaindermen, assigns, executors, administrators, personal representatives,
trustees and fiduciaries. Notwithstanding anything to the contrary herein
contained, no beneficial interest of any person in the Collateral Account shall
be subject to anticipation or assignment by such person, nor shall the
Collateral Account be subject to interference or control of any creditor of such
person, or be taken or reached by any legal or equitable process in satisfaction
of any debt or other liability of such person prior to disbursement, and each
party hereby agrees to indemnify the other parties in connection with any loss
or diminution of such party's interest in the Collateral Account as a result of
any such matter.
7.3 Any notice, direction, instruction or other communication
required or permitted hereunder shall be given in writing by hand delivery, by
registered or certified first class mail, return receipt requested, postage
prepaid, or by expedited courier service that regularly requires signed receipts
evidencing delivery, in each case addressed to the party to receive the same at
its respective address set forth below, or to such other address as such party
may have designated by notice to the others in accordance with the provisions of
this Section 7.3.
8
<PAGE>
(i) To the Borrower:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
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.
(ii) If to a Lender, at the address set forth beneath such
Lender's name on Schedule I hereto;
(iii) To the Collateral Agent:
Castle Energy Corporation
One Radnor Corp. Center
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
Attn: Joseph Castle, President
or at such other address as any party shall have specified by notice in writing
to the other parties.
Copies of any written communications sent by the Borrower or the
Lenders to the Collateral Agent relating to this Collateral Agreement shall be
sent to the other parties hereto, and copies of any written communications sent
by the Collateral Agent relating to this Collateral Agreement shall be sent to
the Borrower and the Lenders. Notwithstanding the foregoing, the Borrower and
the Lenders shall have the right to engage in direct written communications
among themselves relating to this Collateral Agreement without providing copies
thereof to the Collateral Agent, except to the extent otherwise required under
the terms of this Collateral Agreement.
All notices, directions, instructions and communications hereunder
shall be effective, and deemed given, if hand delivered, on and as of the date
of receipt thereof, as evidenced by a written receipt by or on behalf of the
party to which the same is so delivered, and, if mailed or sent by expedited
courier, on and as of the date of delivery, as evidenced by the acknowledgement
of delivery issued with respect thereto by the applicable postal authorities or
by the confirmation of delivery issued by the applicable courier service.
7.4 (a) The parties agree that this Collateral Agreement, and the
respective rights, duties and obligations of the parties hereunder, shall be
governed by, and interpreted in accordance
9
<PAGE>
with, the laws of the State of New York, without giving effect to principles of
conflicts of law thereunder.
(b) Each of the parties hereby (i) irrevocably consents and
agrees that any legal or equitable action or proceeding arising under
or in connection with this Collateral Agreement shall be brought
exclusively in any Federal or state court within the county of New
York, New York, and any court to which an appeal may be taken in any
such litigation, and (ii) by execution and delivery of this Collateral
Agreement, irrevocably submits to and accepts with respect to any such
action or proceeding, for such party's heirs, beneficiaries
remaindermen, personal representatives, executors, administrators,
fiduciaries and permitted assigns and in respect of such party's
properties and assets, generally and unconditionally, the jurisdiction
of the aforesaid courts, and irrevocably waives any and all rights such
party may now or hereafter have to object to such jurisdiction under
the constitution or laws of the State of New York or the Constitution
or laws of the United States of America or otherwise. Each of the
parties hereby irrevocably waives any right it may have to a jury trial
in connection with this Collateral Agreement.
7.5 This Collateral Agreement, and any notice, direction or other
document or instrument delivered in connection herewith, may be executed in
counterparts, each of which shall constitute an original instrument, but all of
which together shall constitute a single agreement, notice, direction, document
or instrument as the case may be. The Borrower and each of the Lenders agree to
cooperate with each other in good faith in joining in any notices or written
instructions that are required to be delivered to the Collateral Agent jointly
by the Borrower and the Lenders.
7.6 The provisions of this Collateral Agreement shall not be altered
or terminated by operation of law or by the occurrence of any event (except as
otherwise specified herein), including, without limitation, the death or
incapacity or the termination of the legal existence of any party hereto.
7.7 This Collateral Agreement shall not be assignable, in whole or in
part, by any party without the prior written consent of the other parties, and
any attempted assignment without such prior written consent shall be void except
that each Lender may assign its rights under this Collateral Agreement to any of
its affiliates or subsidiaries without the consent of any other party.
7.8 This Collateral Agreement, and any notice, direction or other
document or instrument delivered in connection herewith, may be executed in
counterparts, each of which shall constitute an original instrument, but all of
which together shall constitute a single agreement, notice, direction, document
or instrument, as the case may be.
7.9 This Collateral Agreement may not be amended or modified nor any
provision hereof waived except by an instrument in writing signed by the party
against whom any amendment or modification or waiver is sought to be enforced.
10
<PAGE>
7.10 Any provision in this Collateral Agreement held to 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 of this Collateral Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
THE BORROWER:
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
---------------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
CASTLE ENERGY CORPORATION,
as Collateral Agent
By: /s/ Richard E. Staedtler
---------------------------------
Name: Richard E. Staedtler
Title: Chief Financial Officer
12
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
/s/Clint Norton
-------------------------------------
Clint Norton
SOUTHWEST CONCEPT INC.,
as Lender
By: /s/Clint S. Norton
---------------------------------
Name: Clint C. Norton
Title:
CASTLE ENERGY CORPORATION,
as Lender
By: /s/Richard E. Staedtler
---------------------------------
Name: Richard E. Staedtler
Title: Chief Financial Officer
13
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
/s/James F. Meara, Jr.
-------------------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA,
as Lender
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: /s/James F. Meara, Jr.
---------------------------------
Name: James F. Meara, Jr.
Title:
14
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Collateral Agreement as of this 1st day of December, 1998.
LENDER:
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA,
as Lender
By: /s/Perry D. Snavely
------------------------------
/s/Tamara Y. Armur
------------------------------
Name: Perry D. Snavely
Tamara Y. Armur
Title: Manager
15
<PAGE>
SCHEDULE I
Lenders and Addresses
- ---------------------
Castle Energy Corporation Principal amount of Amended Note: $1,000,000
c/o CEC, Inc. Accrued interest thereon at 10% per annum
One Radnor Corporate Center prior to an Event of Default, and 12% per
100 Matsonford Road, Suite 250 annum subsequent to an Event of Default
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher LLP
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
1
<PAGE>
SCHEDULE I
Lenders and Addresses
- ---------------------
Clint Norton Principal amount of Amended Note: $90,000
1710 Dallas Parkway, Suite 120 Accrued interest thereon at 10% per annum
Dallas, Texas 75248 prior to an Event of Default, and 12% per
(972) 931-8509 annum subsequent to an Event of Default
Southwest Concept Inc. Principal amount of Amended Note: $60,000
17110 Dallas Parkway, Suite 120 Accrued interest thereon at 10% per annum
Dallas, Texas 75248 prior to an Event of Default, and 12% per
Attn: Clint Norton annum subsequent to an Event of Default
(972) 931-8509
2
<PAGE>
SCHEDULE I
Lenders and Addresses
- ---------------------
James F. Meara, Jr. Principal amount of Amended Note: $75,000
8150 N. Central Expressway, #795 Accrued interest thereon at 10% per annum
Dallas, Texas 75206 prior to an Event of Default, and 12% per
(214) 692-7066 annum subsequent to an Event of Default
Donaldson Lufkin Jenrette Principal amount of Amended Note: $75,000
Securities Corporation Custodian Accrued interest thereon at 10% per annum
SEP FBO James F. Meara IRA prior to an Event of Default, and 12% per
Pershing Division of Donaldson annum subsequent to an Event of Default
Lufkin & Jenrette Securities
Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
3
<PAGE>
SCHEDULE I
Lenders and Addresses
- ---------------------
Lincoln Trust Company Principal amount of Amended Note: $200,000
FBO Perry D. Snavely IRA Accrued interest thereon at 10% per annum
P.O. Box 5831 prior to an Event of Default, and 12% per
Denver, Colorado 80217 annum subsequent to an Event of Default
Attn: Monique Rice
(610) 260-6388
4
<PAGE>
Annex 1
-------
PAYMENT INSTRUCTION LETTER
[Penn Octane Corporation letterhead]
December 1, 1998
International Bank of Commerce-Brownsville
630 East Elizabeth Street
Brownsville, Texas 78520
Re: Payment Instructions
--------------------
Ladies and Gentlemen:
We refer you to the judgment confirming the arbitral award for
$3,246,754 entered against the International Bank of Commerce-Brownsville in
favor of the Penn Octane Corporation (the "Company") on February 28, 1996 by the
197th District Court in and for Cameron County, Texas, which judgment was upheld
by the Texas Court of Appeals on June 18, 1998, (the "Judgment").
We note that IBC-Brownsville has filed for a rehearing of the case
underlying the Judgment by the Texas Court of Appeals, and that as of the date
set forth above, the Texas Court of Appeals has not ruled on the IBC-Brownsville
request for rehearing.
The Company hereby notifies IBC-Brownsville that the Company has
assigned the Judgment and the proceeds thereof to Castle Energy Corporation
("CEC") for itself and on behalf of certain other lenders as more particularly
described in the enclosed Assignment of Judgment.
In the event the Judgment becomes final and non-appealable, or is
otherwise settled by the Company and IBC-Brownsville, IBC-Brownsville is hereby
instructed to remit by wire transfer any and all proceeds of the Judgment or
from such settlement, as the case may be, in immediately available funds to the
account of CEC set forth below:
<PAGE>
Account Number:
ABA Number:
Bank:
Contact:
Phone:
If you have any questions regarding this matter, please contact Ian T.
Bothwell, Chief Financial Officer and Treasurer, Penn Octane Corporation, at
(562) 929-6789 ext. 101.
PENN OCTANE CORPORATION
By: /s/Jerome B. Richter
--------------------------------
Name: Jerome B. Richter
Title:
<PAGE>
Exhibit B
ASSIGNMENT OF JUDGMENT
<PAGE>
ASSIGNMENT OF JUDGMENT AGREEMENT
This LITIGATION CLAIMS ASSIGNMENT AGREEMENT ("Assignment") is made as
of December 1, 1998 by and between PENN OCTANE CORPORATION, a Delaware
corporation (formerly known as "International Energy Development Corp.", and
herein called "Assignor") and CASTLE ENERGY CORPORATION, as assignee for itself
and as Collateral Agent ("Collateral Agent") for the Lenders listed on Schedule
I hereto ("Lenders").
WHEREAS, Assignor, and Lenders have entered into that certain Rollover
and Assignment Agreement dated as of December 1, 1998 (as the same may be
further amended from time to time, the "Rollover Agreement");
WHEREAS, Assignor, Collateral Agent, and the Lenders have entered into
that certain Collateral Agreement dated as of December 1, 1998 (as the same may
be amended from time to time, the "Collateral Agreement");
WHEREAS, Assignor has represented to Collateral Agent and the Creditors
that: an arbitral award was rendered against International Bank of
Commerce-Brownsville ("IBC") in favor of Assignor; the value of the arbitral
award as of July 31, 1998 was approximately $3.4 million; a judgment was entered
on February 28, 1996 by the 197th Judicial District Court of Cameron County,
Texas, in Civil Action No. 94-08-4008-C, known as International Energy
Development Corp. v. International Bank of Commerce - Brownsville; such judgment
modified the arbitral award in certain respects; an appeal was taken to the
Court of Appeals for the Thirteen District of Texas (the "Corpus Christi Court
of Appeals"); on June 18, 1998, the Corpus Christi Court of Appeals rendered an
Opinion and Order in No. 13-96-298-CV, known as International Bank of Commerce -
Brownsville, Appellant v. International Energy Development Corp., Appellee; such
Opinion and Order confirmed the original arbitral award in all respects; and IBC
has filed a motion for rehearing with the Corpus Christi Court of Appeals.
WHEREAS, by this Assignment, the respective parties to the Rollover
Agreement and the Collateral Agreement wish to provide, among other things, for
the assignment and recordation of the Judgment (as hereinafter defined) pursuant
to Section 12.014 of the Texas Property Code.
NOW, THEREFORE, in consideration of the premises and other value, the
receipt and sufficiency of which are hereby acknowledged, Assignor and
Collateral Agent for itself and the Lenders do hereby agree as follows:
1. To secure the Loans and all other obligations of Assignor under the
Rollover Agreement, the Amended Notes (as defined in the Rollover Agreement),
the Collateral Agreement, this Assignment and all documents executed or
delivered by Assignor in connection therewith (collectively, the "Obligations"),
Assignor hereby unconditionally and irrevocably assigns, transfers, conveys and
sets over to Collateral Agent for the benefit of itself and all Lenders, and
<PAGE>
grants a security interest in and lien on, all of Assignor's right, title and
interest in and to: (a) that certain arbitral award ("Arbitral Award") in favor
of International Energy Development Corp. against IBC; the judgment known as
International Energy Development Corp. v. International Bank of Commerce -
Brownsville, entered on February 28, 1996 by the 197th Judicial District Court
of Cameron County, Texas, Civil Action No. 94-08-4008-C (the "District Court
Decision"); that certain Opinion and Order known as International Bank of
Commerce - Brownsville, Appellant v. International Energy Development Corp.,
Appellee, Court of Appeals for Thirteenth District of Texas Corpus Christi, No.
13-96-298-CV, entered on June 18, 1998 ("Appellate Decision"; the Arbitral
Award, the District Court Decision, the Appellate Decision and any other order
related thereto or any appeal therefrom or modification thereof are collectively
referred to herein as, the "Judgment"); and (b) any and all appeal bond,
collateral, payment, realization or proceeds relating to or arising out of the
Judgment, any appeal thereof or any settlement with respect thereto, including,
without limitation, all damages, statutory damages or penalties, exemplary or
punitive damages, attorneys' fees, costs and pre-judgment and post-judgment
interest (all of the foregoing being collectively referred to herein as, the
"Proceeds"). Collateral Agent on behalf of itself and the Lenders shall be
entitled to the Proceeds subject to the terms and conditions set forth in the
Collateral Agreement until the Obligations are paid in full and the Rollover
Agreement is terminated.
2. Assignor represents and warrants that it owns all right, title and
interest in and to the Judgment, and the Proceeds, free and clear of all liens,
claims and encumbrances except as granted pursuant to the Rollover Agreement,
the Collateral Agreement and this Assignment. Assignor further represents and
warrants that it is the same entity as the plaintiff named in the Judgment,
having changed its name from International Energy Development Corp. to Penn
Octane Corporation.
3. Assignor agrees that in the event it receives any of the Proceeds,
it shall set aside and hold in trust for Collateral Agent all such Proceeds, and
pay such Proceeds to Collateral Agent subject to the Collateral Agreement
immediately upon receipt thereof by Assignor.
4. For the purpose of carrying out the terms of this Assignment,
Assignor hereby irrevocably constitutes and appoints Collateral Agent and any
officer or agent thereof, with full power of substitution, as its
attorney-in-fact with full irrevocable power and authority in the place and
stead of Assignor and in the name of Assignor or in its own name, from time to
time in Collateral Agent's sole discretion, without notice to or assent by
Assignor, to do the following on behalf of Assignor:
(i) to direct any party liable for any payment under the
Judgment (including any entity that has posted a bond related thereto) to make
payment of any and all Proceeds directly to Collateral Agent subject to the
Collateral Agreement;
(ii) to ask, demand, collect, receive and give acquittances
and receipts for any and all Proceeds (each of which acquittances and receipts
shall be a full and complete release, discharge and acquittance to the extent of
any amount paid to Collateral Agent) and, in the name of Assignor or its own
name or otherwise, to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other instruments for the payment of Proceeds; and
-2-
<PAGE>
This power of attorney is a power coupled with an interest and shall be
irrevocable until the discharge by the Assignor of all the Obligations owing to
the Collateral Agent and the Lenders including, without limitation, payment in
full of the indebtedness of Assignor to Collateral Agent and the Lenders.
The parties hereto acknowledge and agree that Collateral Agent shall
not be entitled to compromise, settle, or otherwise affect the Judgment or to
participate in or control any appeal, settlement, or prosecution of the
Judgment.
5. If any Event of Default (as such term is defined in any Amended Note
or used in the Rollover Agreement) shall have occurred and be continuing,
Collateral Agent shall have, in addition to all other rights granted to it in
the Rollover Agreement, the Amended Notes, this Assignment, or in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights of a secured party under applicable law as if (and whether or not) the
Judgment and/or the Proceeds are collateral subject to Chapter 9 of the Texas
Business and Commerce Code.
6. This Assignment shall be binding upon and inure to the benefit of
Assignor, Collateral Agent and the Lenders and their respective successors and
assigns.
7. This Assignment shall be governed by and construed in accordance
with the laws of the State of Texas other than the conflicts of laws rules
thereof.
8. If any provision of this Assignment shall for any reason be held to
be invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other provision of such document, and such
invalid, illegal or unenforceable provision shall be interpreted in such a
manner to render it valid, legal and enforceable and to most nearly achieve the
intents and purposes hereof.
9. Each party hereto agrees to promptly execute and deliver to the
other party hereto any and all further or additional instruments and documents
including, without limitation, Uniform Commercial Code-1 financing statements,
and take such further action as such other party may reasonably request in order
to fully effect the purposes of this Assignment. The provisions of this
Assignment shall continue in full force and effect notwithstanding any
commencement of a case under the federal bankruptcy code. Neither this
Assignment nor any of the terms hereof may be amended, waived, discharged,
modified or terminated in any respect unless such amendment, waiver, discharge,
modification, or termination is by an instrument in writing signed by each party
hereto.
10. All notices, consents, approvals, or other communications required
or permitted to be given pursuant hereto shall be in writing and shall either
(i) be mailed by first-class United States mail, postage prepaid, registered or
certified with return receipt requested, (ii) delivered in person to the
-3-
<PAGE>
intended addressee, (iii) sent by telecopy, or (iv) sent by express mail (such
as Federal Express or United States Express Mail). Notice mailed pursuant to
alternative (i) shall be effective three days after its deposit in the United
States mail. Notice given in any other manner shall be effective only on the
date actually received by the addressee. For purposes of notice, the addresses
of the parties shall be as follows:
To Assignor: Penn Octane Corporation
900 Veterans Boulevard, Suite 240
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, Esquire
To Collateral Agent: Castle Energy Corporation
c/o CEC, Inc.
One Radnor Corporate Center
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
Attn: Mr. Joseph Castle
With a copy to: Duane, Morris & Heckscher, L.L.P.
One Liberty Place
Philadelphia, Pennsylvania 19103-7396
Attn: Margery N. Reed, Esquire
Each party shall have the right to change its address for notice to any other
location by the giving of 10 days' notice to the other party in the manner set
forth in this Paragraph.
11. Assignor may not assign, encumber or transfer, voluntarily or by
operation of law, its interest in the Judgment or the Proceeds without the prior
written consent of Collateral Agent, and any attempt to do so shall be void.
12. This Assignment may be executed in any number of counterparts, each
of which shall be deemed an original and all of which shall constitute one and
the same instrument.
13. Assignor hereby acknowledges and agrees that this Assignment may be
recorded in accordance with Texas Property Code Section 12.014, and Collateral
Agent and the Lenders shall be entitled to all of the benefits of such statute.
-4-
<PAGE>
IN WITNESS WHEREOF, this Assignment is executed as of the date first
above mentioned.
PENN OCTANE CORPORATION
(formerly International Energy Development Corp.)
By: /s/ Jerome B. Richter
------------------------------------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
CASTLE ENERGY CORPORATION
for itself and as Collateral Agent for the Lenders
By: /s/ Joseph L. Castle II
------------------------------------------------
Name: Joseph Castle
Title: Chairman and Chief Executive Officer
-5-
<PAGE>
SCHEDULE I
LIST OF LENDERS
1. Castle Energy Corporation
2. Clint Norton
3. Southwest Concept Inc.
4. James F. Meara, Jr.
5. Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA
6. Lincoln Trust Company FBO Perry D. Snavely IRA
-6-
<PAGE>
THE STATE OF CALIFORNIA :
:
COUNTY OF RIVERSIDE :
This instrument was acknowledged before me on December 2, 1998 by
Jerome B. Richter, Chairman of the Board, President and Chief Executive Officer
of Penn Octane Corporation, Incorporated, a Delaware corporation (formerly
International Energy Development Corp.), on behalf of said corporation.
[Notary Stamp] /s/ Ivy F. Scott
----------------------------------
Ivy F. Scott Notary Public in and for the
Commission #1174910 State of California
Notary Public - California
Riverside County
My Comm. Expires Feb 28. 2002
My Commission Expires:
February 28, 2002
-7-
<PAGE>
THE COMMONWEALTH OF PENNSYLVANIA :
:
COUNTY OF DELAWARE :
This instrument was acknowledged before me on December 8, 1998, by
Joseph Castle, Chairman of the Board and President of Castle Energy Corporation,
a Delaware corporation, on behalf of said corporation.
[Seal]
Kathleen C. Harting /s/ Kathleen C. Harting
Commonwealth of Pennsylvania ----------------------------
Notary Public Notary Public in and for the
Commonwealth of Pennsylvania
[Stamp]
Notarial Seal
My Commission Expires: Kathleen C. Harting, Notary Public
South Manheim Twp., Schuylkill County
- ------------------------- My Commission Expires Apr. 13, 2002
Member, Pennsylvania Association of Notaries
-8-
<PAGE>
December 1, 1998 Exhibit C
---------
AMENDED PROMISSORY NOTE
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
(the "Borrower"), promises to pay to the order of Castle Energy Corporation, or
its assigns ("Holder"), at the office of the Borrower in Redwood City,
California or such other place as Holder may designate in writing at least three
business days prior to the date fixed for such payment, the entire principal sum
of ONE MILLION DOLLARS ($1,000,000), together with interest thereon, on the
earlier of (i) June 30, 1999, (ii) a date determined by the Borrower within ten
(10) business days of the closing date of any raising of debt or equity
financing of the Borrower, resulting in net proceeds to the Borrower in excess
of $2,250,000 or (iii) the occurrence of an Event of Default hereunder
(collectively, the "Maturity Date"), at which time all principal and any accrued
and unpaid interest thereon shall be due and owing.
This Amended Note was issued under and is entitled to the benefits of
that certain Rollover and Assignment Agreement dated as of December 1, 1998 (the
"Rollover Agreement") by and among the Borrower and the Lenders as set forth in
Schedule I of the Agreement. All capitalized terms used herein and not defined
shall have the meanings ascribed to them in the Rollover Agreement.
This Amended Note shall accrue interest from the date hereof at the
rate of ten percent (10%) per annum, payable on December 31, 1998, March 31,
1999 and June 30, 1999 (or the Maturity Date, if earlier). Upon the occurrence
of an Event of Default (as defined herein), all amounts owing under this Amended
Note shall become immediately due and payable and interest shall accrue thereon
at the default interest rate of twelve percent (12%) per annum until the entire
principal balance of this Amended Note and all interest accrued hereon shall
have been paid in full and the Holder may exercise all of its rights and
remedies under the Rollover Agreement and all other documents executed or
delivered in connection therewith and/or applicable law. Payment of this Amended
Note may be enforced by suit or other process of law. This Amended Note may be
prepaid at any time prior to maturity without penalty in an amount equal to the
principal amount hereof plus interest thereon to the date of prepayment.
The Borrower shall pay the sum of $41,917.81 to the Holder on December
11, 1998, which sum represents accrued and unpaid interest to December 1, 1998
on the Original Note (the "Original Note Interest").
All payments hereunder shall be payable in lawful money of the United
States.
<PAGE>
The Borrower shall be in default hereunder upon the occurrence of any
of the following events of default ("Events of Default"): (i) the failure by the
Borrower to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due hereunder and such failure shall have continued for a period of ten (10)
days; (iii) 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; (iv) a petition
for reorganization, liquidation or arrangement filed against the Borrower under
the Federal bankruptcy laws and such petition shall not have been dismissed
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms of any indebtedness of the Borrower for borrowed money in excess of
$50,000; (vii) the existence of any final, non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any representation, warranty or covenant (other than as described in the
preceding clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment of Judgment or Collateral Agreement, and, if such breach is capable
of cure, the failure of Borrower to cure such breach within a period of fifteen
(15) days.
If any payment owing under this Amended Note 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 costs, attorneys' fees and expenses incurred by Holder hereof in
connection with any insolvency, bankruptcy, reorganization, arrangement or
similar proceedings involving Borrower, or involving any endorser or guarantor
hereof, which in any way affects the exercise by Holder hereof of its rights and
remedies under this Amended Note.
If any payment remains owing under this Amended Note after June 30,
1999, the Holder thereof shall have certain conversion rights in respect of such
Amended Note as set forth in Section 7A of the Rollover Agreement.
Presentment, demand, protest, notice of protest, dishonor and
non-payment of this Amended Note and all notices of every kind are hereby
waived.
The terms "Borrower" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
No delay on the part of the Holder in the 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.
Any provision in this Amended Note that is held to 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 Amended Note are declared to be severable.
<PAGE>
This Amended Note shall be governed by, and construed in accordance
with, the laws of the State of New York 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 New York, County of New York.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
Borrower has caused this Amended Note to be executed by its duly authorized
officer as of the date first above written.
PENN OCTANE CORPORATION
Attest: By: /s/Jerome B. Richter
---------------------
Jerome B. Richter
___________________________ Chairman, President and
Title: ____________________ Chief Executive Officer
<PAGE>
Exhibit D
---------
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK 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 November 30, 2001
Warrant to Purchase 225,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Castle Energy Corporation
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 November 30, 2001 (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), 150,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $1.75 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.
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 Stock Market, or, if the Common Stock
is not then listed or admitted to trading on the NASDAQ 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.
<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 12 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:
(A) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(C) combines its outstanding shares of Common Stock into a smaller
number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of its
capital stock;
then the number and kind of securities purchasable upon exercise or exchange of
this Warrant and the Exercise Price in effect immediately prior to such action
shall each be adjusted so that the Holder may receive upon exercise or exchange
of this Warrant and payment of the same aggregate consideration, 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 such action.
<PAGE>
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a 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 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 securities 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) Deferral of Issuance or Payment. In any case in which an event
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer making
such adjustment until the occurrence of such event. If the Company so defers
making any such adjustment and if this Warrant is exercised after such record
date but before the occurrence of such event, the shares of Common Stock and
other capital stock of the Company, if any, issuable upon such exercise, had
such adjustment been made as of the record date, over and above the shares of
Common Stock or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price as unadjusted, shall be issued
promptly upon the occurrence of such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 3.
<PAGE>
(d) When No Adjustment Required. No adjustment need be made for a
change in the par value or no par value of the Common Stock.
(e) 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 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 purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.
(f) 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.
(g) 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.
(h) Common Stock Defined. Subject to the provisions of Section 7
hereof, 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. Reclassification, Reorganization, Consolidation or Merger. In the
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of the
Company with or into another corporation (other than a merger in which merger
the Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise or exchange of this Warrant)
or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder shall
have the right thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property (including cash)
receivable upon such reclassification, capital reorganization and other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been received upon exercise or exchange of this
Warrant immediately prior to such reclassification, capital reorganization,
change, consolidation, merger, sale or conveyance. Any such provision shall
include provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 7 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or classification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of subsection (a)
of Section 6.
<PAGE>
8. 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 on which (x) a record is to be taken for
the purpose of 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.
9. 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. 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.
10. Repurchase Right. Notwithstanding any other provisions of this
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such other
exchange on which the Company's Common Stock may then be quoted, exceeds $10.00
for a period of twenty (20) consecutive trading days, upon not less than thirty
(30) 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 thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof 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 agreed upon by the Company
and the Holder. 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.
<PAGE>
11. 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.
12. 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.
13. 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 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.
14. 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.
<PAGE>
15. 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 laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
-----------------------------------
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
Dated December 1, 1998
<PAGE>
PURCHASE FORM
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the
within Warrant to purchase ___________ shares of Common Stock and hereby makes
payment of $____________ in payment of the exercise price thereof.
Signature______________________________
<PAGE>
Exhibit E
---------
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 Borrower), and the persons whose signatures appear
on the execution pages of this Agreement.
This Agreement is entered into pursuant to the Rollover Agreement and
Assignment of Judgment between the Borrower and each of the Lenders listed (the
"Rollover Agreement"). In order to induce the Lenders to enter into the Rollover
Agreement, the Borrower has agreed to provide the registration rights set forth
in this Agreement. The execution of this Agreement by the Borrower is a
condition to the closing under the Rollover Agreement.
The parties hereby agree as follows:
1. Definitions
Capitalized terms used herein without definition shall have the
respective meanings set forth in the 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
Rollover 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.
<PAGE>
Registrable Securities: All shares of Common Stock issuable upon
exercise of the Warrants or conversion of the Amended Notes, plus any Common
Stock issued or issuable to the Lenders in respect of the Warrant Shares and
Conversion Shares, pursuant to any stock split, stock dividend,
recapitalization, or similar event. The Warrants are not Registrable Securities
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 Borrower 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 a Lender
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 Borrower
in complying with Section 3 hereof, including all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Borrower, and blue
sky fees and expenses.
Registration Statement: Any registration statement of the Borrower
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 Warrant Shares and the Conversion 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 Rollover
Agreement and applicable law.
Rollover Agreement: The Agreement by and among the Borrower and the
Lenders thereunder pursuant to which the Warrants were issued.
Rule 144: Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter adopted
by the Commission (excluding Rule 144A).
2. Securities Subject to this Agreement
The securities entitled to the benefits of this Agreement are the
Registrable Securities.
-2-
<PAGE>
3. "Piggy-Back" Registrations.
(a) If at any time the Borrower shall determine to register any of its
Common Stock under the Securities Act, whether in connection with a public
offering by the Borrower, 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
Borrower shall promptly give written notice thereof to the Lenders who shall be
registered holders 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 Borrower within 30
days after such notice by the Lenders 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 Borrower; provided, however, that (a) any distribution
of Registrable Securities pursuant to such registration shall be managed by the
investment banking firm, if any, managing the distribution of the securities
being offered by the Borrower on the same terms as all other securities to be
registered, and (b) the Borrower shall not be required under this Section 3 to
include Registrable Securities in any registration of securities if the Borrower
shall have been advised by the investment banking firm managing the offering of
the securities proposed to be registered by the Borrower or others that the
inclusion of Registrable Securities in such offering would substantially
interfere with the orderly sale of such securities which the Borrower 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 Borrower 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 Borrower's
counsel) shall be borne by the Borrower, except that the Borrower shall not bear
underwriting discounts or commissions attributable to Registrable Securities,
the fees of any separate counsel for the holders of Registrable Securities or
related transfer taxes.
4. Registration Procedures.
(a) In connection with any registration pursuant to Section 3 hereof,
the Borrower will prepare and file with the SEC, a Registration Statement, and
any amendments and supplements thereto, on any form for which the Borrower then
qualifies or which counsel for the Borrower 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 Borrower will (i) furnish to
counsel selected by the Lenders copies of all such documents proposed to be
filed, which documents will be subject to the review of such counsel, and (ii)
notify the Lenders 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 Borrower will also (i) promptly notify each Lender of
the effectiveness of such Registration Statement, (ii) furnish to each Lender
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 such Lender 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 any 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 Borrower 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
Lenders, 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 Borrower 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 Borrower will immediately notify each Lender
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 each such Lender 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 Borrower 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 Borrower, the Borrower 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 Borrower 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
Lenders are 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 Borrower or the managing underwriters),
not to effect any public sale or distribution of securities of the Borrower 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.
-4-
<PAGE>
6. Indemnification
(a) Indemnification by Borrower. The Borrower 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 Borrower by such holder for
use therein; provided, however, that the Borrower 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
Borrower in writing such information as the Borrower may reasonably request for
use in connection with any Registration Statement or Prospectus. Each Lender
shall indemnify and hold harmless, to the full extent permitted by law, the
Borrower, and its officers, directors, agents and employees, each person who
controls the Borrower (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 Borrower 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 Borrower 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 settlement 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 indemnified 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 Borrower 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 Borrower shall deliver to such holder a written statement as to
whether the Borrower has complied with such information and requirements.
Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to
require the Borrower 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 Borrower. No Lender may participate in any underwritten registration
hereunder unless such Lender (i) agrees to sell such Lender's Registrable
Securities on the basis provided in the underwriting arrangements approved by
the Borrower, 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 Borrower 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
securities 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 Borrower in accordance with the provisions of this Section 9(b), which
address initially is, with respect to each Lender, the address set forth on
Schedule I to the Rollover Agreement; and (ii) if to the Borrower, 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 Borrower 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 or
the Amended Note.
(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.
-8-
<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 Borrower with respect to the securities
sold pursuant to the Rollover 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
December 1, 1998.
PENN OCTANE CORPORATION
By: /s/Jerome B. Richter
-----------------------------------------------
Jerome B. Richter
Chairman, President and Chief Executive Officer
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
December 1, 1998.
CASTLE ENERGY CORPORATION
By: /s/Richard E. Staedtler
------------------------------
Name: Richard E. Staedtler
Title: Chief Financial Officer
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
December 1, 1998.
/s/ Clint Norton
-------------------------------
Clint Norton
SOUTHWEST CONCEPT INC.
By: /s/ Clint C. Norton
--------------------------------
Name: Clint C. Norton
Title:
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
December 1, 1998.
/s/ James F. Meara, Jr.
-------------------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: /s/James F. Meara, Jr.
---------------------------
Name: James F. Meara, Jr.
Title:
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
December 1, 1998.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By: /s/ Perry D. Snavely
--------------------------
/s/ Tamara Y. Armur
--------------------------
Name: Perry D. Snavely
Tamara Y. Armur
Title: Manager
-13-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
- ---------------------
<S> <C>
Castle Energy Corporation Principal amount of promissory note: $1,000,000
c/o CEC, Inc.
One Radnor Corporate Center Warrants: 225,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
</TABLE>
-1-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
- ---------------------
<S> <C>
Clint Norton Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 20,250
(972) 931-8509
Southwest Concept Inc. Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120
Dallas, Texas 75248 Warrants: 13,500
Attn: Clint Norton
(972) 931-8509
</TABLE>
-2-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
- ---------------------
<S> <C>
James F. Meara, Jr. Principal amount of promissory note: $75,000
8150 N. Central Expressway, #795
Dallas, Texas 75206 Warrants: 16,875
(214) 692-7066
Donaldson Lufkin Jenrette Principal amount of promissory note: $75,000
Securities Corporation Custodian
SEP FBO James F. Meara IRA Warrants: 16,875
Pershing Division of Donaldson Lufkin &
Jenrette Securities Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
</TABLE>
-3-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Lenders and Addresses
- ---------------------
<S> <C>
Lincoln Trust Company Principal amount of promissory note: $200,000
FBO Perry D. Snavely IRA
P.O. Box 5831 Warrants: 45,000
Denver, Colorado 80217
Attn: Monique Rice
(610) 260-6388
</TABLE>
-4-
<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______________________________
-5-
<PAGE>
Exhibit 11.1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
Basic Diluted Basic Diluted
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
I. Shares Outstanding, Net of Treasury
Stock Purchased During the Period:
Stock, net 2,940,729 2,940,729 4,716,506 4,716,506
Purchase of treasury stock (weighted) (960) (960)
---------- ---------- ---------- ----------
2,940,729 2,940,729 4,715,546 4,715,546
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 60,513 30,144
---------- ---------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 2,940,729 3,001,242 4,715,546 4,745,690
========== ========== ========== ==========
IV. Net Income $ 2,511 $ 2,511 $ 2,822 $ 2,822
========== ========== ========== ==========
V. Net Income Per Share $ .85 $ .84 $ .60 $ .59
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1998
INCLUDED IN PART I FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-30-1998
<CASH> 40,447
<SECURITIES> 471
<RECEIVABLES> 8,717
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,397
<PP&E> 13,114
<DEPRECIATION> 8,032
<TOTAL-ASSETS> 67,426
<CURRENT-LIABILITIES> 13,804
<BONDS> 0
0
0
<COMMON> 3,402
<OTHER-SE> 50,219
<TOTAL-LIABILITY-AND-EQUITY> 67,426
<SALES> 20,936
<TOTAL-REVENUES> 20,936
<CGS> 12,946
<TOTAL-COSTS> 17,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,923
<INCOME-TAX> 1,412
<INCOME-CONTINUING> 2,511
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,511
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
</TABLE>
