<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 March 31, 1999
----------------------------------------
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)
<TABLE>
<CAPTION>
Delaware 76-0035225
- -------------------------------------------------------------- ------------------------------------
<S> <C>
(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)
</TABLE>
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: 2,601,029 shares of
Common Stock, $.50 par value outstanding as of April 30, 1999.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1999 (Unaudited)
and September 30, 1998...............................................1
Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998 (Unaudited)............................2
Consolidated Statements of Operations - Six Months Ended
March 31, 1999 and 1998 (Unaudited)..................................3
Consolidated Statements of Cash Flows - Six Months Ended
March 31, 1999 and 1998 (Unaudited)..................................4
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1998 and Six Months Ended March
31, 1999 (Unaudited).................................................5
Notes to the Consolidated Financial Statements (Unaudited)...........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................15
Item 3. Qualitative and Quantitative Disclosures About Market Risk............25
Part II. Other Information
Item 1. Legal Proceedings....................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................26
Signature ..................................................................................27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 43,845 $ 36,600
Restricted cash........................................................... 924 613
Accounts receivable....................................................... 7,964 8,381
Marketable securities - Penn Octane Corporation........................... 575 471
Prepaid transportation, net............................................... 171 1,123
Prepaid expenses and other current assets................................. 204 293
Prepaid gas purchases..................................................... 852
Deferred income taxes..................................................... 2,765
Note receivable - Penn Octane Corporation................................. 100 1,000
Estimated realizable value of discontinued net refining assets............ 3,495 3,623
-------- --------
Total current assets.................................................... 57,278 55,721
Property, plant and equipment, net:
Natural gas transmission.................................................. 75 62
Furniture, fixtures and equipment......................................... 265 307
Oil and gas properties, net (full cost method)................................ 4,752 4,600
Gas contracts, net............................................................ 1,480 6,285
Investment in Penn Octane Corporation preferred stock......................... 477
Other assets.................................................................. 17 29
-------- --------
Total assets.............................................................. $ 64,344 $ 67,004
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable.......................................................... $ 401
Accounts payable.......................................................... 6,051 $ 8,658
Accrued expenses.......................................................... 825 1,663
Net refining liabilities retained......................................... 5,900 5,129
-------- --------
Total current liabilities............................................... 13,177 15,450
Other long-term liabilities................................................... 1 1
-------- --------
Total liabilities....................................................... 13,178 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 shares issued at March 31, 1999 and September 30, 1998........ 3,402 3,402
Additional paid-in capital................................................ 67,122 67,122
Retained earnings......................................................... 40,001 34,836
-------- --------
110,525 105,360
Treasury stock at cost - 4,202,617 shares at March 31, 1999 and
3,862,917 shares at September 30, 1998.................................. (59,359) (53,807)
-------- --------
Total stockholders' equity ............................................. 51,166 51,553
-------- --------
Total liabilities and stockholders' equity.............................. $64,344 $ 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 March 31,
-----------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.......................................................... $ 21,697 $ 17,885
------------ -----------
21,697 17,885
------------ -----------
Exploration and production:
Oil and gas sales ................................................. 581 562
Well operations ................................................... 87 57
------------ -----------
668 619
------------ -----------
22,365 18,504
------------ -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ..................................................... 13,318 11,113
Transportation .................................................... 494 400
Operating costs (recovery) ........................................ (16)
General and administrative ........................................ 67 12
Depreciation and amortization ..................................... 2,365 2,366
------------ -----------
16,244 13,875
------------ -----------
Exploration and production:
Oil and gas production ............................................ 287 183
General and administrative ........................................ 149 85
Depreciation, depletion and amortization .......................... 82 164
------------ -----------
518 432
------------ -----------
Corporate general and administrative expenses............................ 778 828
------------ -----------
17,540 15,135
------------ -----------
Operating income......................................................... 4,825 3,369
------------ -----------
Other income:
Interest income........................................................ 478 594
Other income........................................................... 33 8
------------ -----------
511 602
------------ -----------
Net income before provision for income taxes............................. 5,336 3,971
------------ -----------
Provision for income taxes:
State.................................................................. 39 40
Federal................................................................ 1,359 1,389
------------ -----------
1,398 1,429
------------ -----------
Net income............................................................... 3,938 2,542
Adjustments for comprehensive income.....................................
------------ ------------
Comprehensive income..................................................... $ 3,938 $ 2,542
============ ============
Net income per share:
Basic.................................................................. $ 1.39 $ .61
============ ============
Diluted................................................................ $ 1.37 $ .61
============ ============
Weightedaverage number of common and potential dilutive common shares
outstanding:
Basic.................................................................. 2,828,233 4,144,129
============ ============
Diluted................................................................ 2,871,967 4,181,244
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.......................................................... $ 42,152 $ 38,148
---------- -----------
42,152 38,148
---------- -----------
Exploration and production:
Oil and gas sales.................................................. 972 1,220
Well operations.................................................... 177 115
---------- -----------
1,149 1,335
---------- -----------
43,301 39,483
---------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases...................................................... 26,264 24,199
Transportation..................................................... 953 860
Operating costs.................................................... (16)
General and administrative......................................... 156 38
Depreciation and amortization...................................... 4,731 4,731
---------- -----------
32,104 29,812
---------- -----------
Exploration and production:
Oil and gas production............................................. 481 348
General and administrative......................................... 396 307
Depreciation, depletion and amortization........................... 149 327
---------- -----------
1,026 982
---------- -----------
Corporate general and administrative expenses........................ 1,891 1,568
---------- -----------
35,021 32,362
---------- -----------
Operating income......................................................... 8,280 7,121
---------- -----------
Other income:
Interest income........................................................ 945 1,231
Other income........................................................... 34 29
---------- -----------
979 1,260
---------- -----------
Net income before provision for income taxes............................. 9,259 8,381
---------- -----------
Provision for income taxes:
State.................................................................. 78 84
Federal................................................................ 2,732 2,933
---------- -----------
2,810 3,017
---------- -----------
Net income............................................................... 6,449 5,364
Adjustment for comprehensive income......................................
---------- -----------
Comprehensive income..................................................... $ 6,449 $ 5,364
========== ===========
Net income per share:
Basic.................................................................. $ 2.24 $ 1.21
========== ===========
Diluted................................................................ $ 2.20 $ 1.20
========== ===========
Weighted average number of common and potential dilutive common shares
outstanding:
Basic.................................................................. 2,884,921 4,434,363
========== ===========
Diluted................................................................ 2,936,124 4,465,767
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
------------------------------
1999 1998
------- -------
<S> <C> <C>
Net cash flow provided by operating activities........................... $13,994 $22,110
------- -------
Cash flows from investing activities:
Investment in pipelines.............................................. (15)
Investment in oil and gas properties................................. (301) (1,209)
Investment in note receivable - Penn Octane Corporation.............. (1,000)
------- -------
Net cash used in investing activities........................... (316) (2,209)
------- -------
Cash flows from financing activities:
Dividends paid to stockholders........................................ (881) (1,414)
Acquisition of treasury stock......................................... (5,552) (17,755)
Proceeds from exercise of stock options............................... 20
------- -------
Net cash provided by (used in) financing activities............. (6,433) (19,149)
------- -------
Net increase (decrease) in cash and cash equivalents..................... 7,245 752
Cash and cash equivalents - beginning of period.......................... 36,600 36,338
------- -------
Cash and cash equivalents - end of period................................ $43,845 $37,090
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<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
Stock acquired................... 339,700 (5,552) (5,552)
Dividends........................ (1,284) (1,284)
Net income....................... 6,449 6,449
--------- ------ ------- ------- --------- ------- -------
Balance - March 31, 1999......... 6,803,646 $3,402 $67,122 $40,001 4,202,617 ($59,359) $51,166
========= ====== ======= ======= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(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 and the six month periods ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1999 or for 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 and six month periods ended March 31, 1999 and 1998
and for a fair statement of financial position at March 31, 1999 and September
30, 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 its 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.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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 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 at this time.
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 decision by the U.S. Supreme Court in June 1998, however,
supports the Company's position.
As of April 30, 1999, neither of the refineries had restarted. The
Powerine Refinery has been 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
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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 is dismantling it. 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
potentially responsible parties for the remediation of the Indian Refinery by
the EPA.
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 or more of its
former refining subsidiaries could be named parties 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.
Litigation
Powerine Arbitration
On October 14, 1997, MG paid the Company $8.7 million. The Company
believed that it was entitled to an additional $2,142. Subsequently, the Company
has recovered $900 in connection with the $2,142 sought.
Rex Nichols et al Lawsuit
In March of 1998, the Company, one of its subsidiaries and one of its
officers were sued by two outside interest owners owning interests in several
wells formerly operated by the Company's subsidiary until May 1997. The lawsuit
was filed in the Fourth Judicial District at Rusk County, Texas.
The lawsuit, as initially filed, sought unspecified net production
revenues resulting from reversionary interests on several wells operated by the
subsidiary. Management believes the Company's exposure on the matter, if any, is
less than $50.
Subsequently the plaintiffs expanded their petition claiming amounts
due in excess of $250 based upon their interpretation of other provisions in the
underlying oil and gas leases. The case is currently in discovery and no date
has been set for a trial. Management believes that the plaintiffs additional
claims are without merit and intends to vigorously defend its position.
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
SWAP Agreement
In April of 1999, IRLP recovered $575 related to litigation against MG
Natural Gas Inc. ("MGNG"), a subsidiary of Metallgesellschaft Corp. ("MG"). The
book value of the recovery was $703. The difference between the book value and
the amount recovered has been recorded as a reduction in the value of
discontinued net refining assets since the recovery relates to IRLP's
discontinued refining operations.
Powerine/EMC/Litigation
In July 1998, the Company sued Powerine and EMC to recover $330 plus
interest. The amount sought represented amounts that Powerine or EMC were
required to pay to the Company under the January 1996 purchase and sale
agreement whereby Powerine merged into a subsidiary of EMC.
In April 1999, the Company recovered $355 from Powerine/EMC. The
recovery was recorded as a reduction in legal expense ($330) and interest income
($25) because the recovery represents reimbursement for Powerine's legal costs
which were paid by the Company in 1996, plus $25 interest.
Other
There have been no material litigation developments since those
reported in Item No. 4 of the Company's Form 10-Q for the period ended December
31, 1998 except as described above.
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.
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(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 have not materially changed the Company's
disclosures and reported financial information because the Company has presented
the required segment information in its consolidated statements of operations
for several years before SFAS131 was effective.
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.
-10-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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 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 purchases
increased $721 and $340 for the six month periods ended March 31, 1999 and 1998,
respectively. For the quarters ended March 31, 1999 and 1998, the cost of gas
purchases increased $577 and $141, respectively.
Note 7 - Information Concerning Reportable Segments
During the six month periods ended March 31, 1999 and March 31, 1998,
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:
Six months ended March 31, 1999:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Profit (Loss)
--------------------------------- -------- -------- -------------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 1,149 ($ 1,026) $ 123
2. Natural gas marketing 42,152 (32,104) 10,048
-------- ------- -------
$ 43,301 ($33,130) $10,171
======== ======= =======
</TABLE>
-11-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Six months ended March 31, 1998:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Profit
--------------------------------- -------- -------- -------------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 1,335 ($ 982) $ 353
2. Natural gas marketing 38,148 (29,812) 8,336
-------- ------- -------
$ 39,483 ($30,794) $ 8,689
======== ======= =======
</TABLE>
Three months ended March 31, 1999:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Profit (Loss)
--------------------------------- -------- -------- -------------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 668 ($ 518) $ 150
2. Natural gas marketing 21,697 (16,244) 5,453
--------- ------- --------
$ 22,365 ($16,762) $5,603
========= ======= ========
</TABLE>
Three months ended March 31, 1998:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Profit
--------------------------------- -------- -------- -------------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 619 ($ 432) $ 187
2. Natural gas marketing 17,885 (13,875) 4,010
--------- ------- -------
$ 18,504 ($14,307) $ 4,197
========= ======= =======
</TABLE>
The individual components of revenue and expenses for each segment are
set forth in the attached "Consolidated Statements of Operations."
Note 7 - Penn Octane Investment
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 to the Texas Supreme Court and such
appeal may not be resolved for a year or more.
-12-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
In March 1999, the Company agreed to convert $900 of its $1,000 note to
90,000 shares of preferred stock of Penn Octane. The preferred shares provide
dividends at 12% per annum which is to be paid semiannually. Interest is payable
in cash or common stock at Penn Octane's election. The preferred shares are
convertible into 360,000 common shares of Penn Octane. In addition, the Company
received 50,000 shares of Penn Octane's common stock as consideration for
entering into this transaction. The remaining $100 note continues to be due on
June 30, 1999.
At March 31, 1999, the Company recorded a $423 provision related to its
$900 preferred stock investment in Penn Octane.
At March 31, 1999, the Company owned 351,000 shares of Penn Octane
common stock, 90,000 shares of preferred stock of Penn Octane and a $100 note
from Penn Octane.
Note 8 - Subsequent Events
Acquisition of AmBrit Energy Corp Asset
On April 12, 1999, the Company entered into an agreement with AmBrit
Energy Corp. ("AmBrit") to acquire all of AmBrit's oil and gas properties. The
oil and gas assets purchased include producing properties in Alabama, Louisiana,
Mississippi, Montana, New Mexico, Oklahoma and Texas as well as undrilled
acreage in several of these states. The Company estimates the proved reserves
acquired to be approximately 27.5 billion feet of cubic gas equivalent. The
consideration to be paid is $22,000 of which ten percent was deposited upon
execution of the related purchase and sale agreement with the balance to be
funded at closing. The purchase price will be adjusted downwards to reflect
profits between the effective date, January 1, 1999 and the closing date. The
Company intends to fund the purchase using corporate cash. The purchase and sale
agreement contains several customary conditions to closing, including approval
by AmBrit's shareholders. The Company anticipates closing by June 1, 1999. There
can, however, be no assurance that the transaction will be consummated.
Investment in Drilling Joint Venture
In May 1999, the Company signed a letter of intent with another
exploration and production company to drill up to twelve exploratory wells in
South Texas. The Company's commitment to the joint venture is $5,300 although
most of this commitment will be released if initial drilling results are not as
estimated. The Company anticipates that these exploratory wells will be drilled
over the next year.
-13-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Investment in Romanian Concessions
In April 1999, the Company purchased an option to acquire three oil and
gas concessions granted to a subsidiary of Costilla Energy Corporation
("Costilla"), by the Romanian government. The Company paid Costilla $65 for the
option.
-14-
<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 one of the Company's subsidiaries 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 contracts expire May 31, 1999.
Gross Margin
A comparison of the gross margins earned by the Company's natural gas
marketing segment is as follows:
<TABLE>
<CAPTION>
Lone Star MGNG
Contract Contract Consolidated
--------- -------- ------------
<S> <C> <C> <C>
Six Months Ended March 31, 1999
Gas Sales........................................... $39,707 $2,445 $42,152
Gas purchases....................................... (23,212) (3,052) (26,264)
------- ------ --------
Gross margin........................................ $16,495 ($ 607) $15,888
======= ======= =======
Six Months Ended March 31, 1998
Gas Sales........................................... $35,690 $2,458 $38,148
Gas purchases....................................... (20,886) (3,313) (24,199)
------- ------- -------
Gross margin........................................ $14,804 $ (855) $13,949
======= ======= =======
</TABLE>
-15-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Natural gas sales under the Lone Star Contract increased $4,017 or
11.3% from the first six months of fiscal 1998 to the first six months 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 six months of fiscal 1999 deliveries and sales to Lone
Star exceeded by approximately 25% those which would have resulted if daily
deliveries had been fixed and equal. The Company expects deliveries and sales to
Lone Star for the period April 1, 1999 to May 31, 1999, the termination date of
the Lone Star Contract, to be approximately 41% less than those which would
result if daily deliveries were fixed and equal.
Gas purchases for the Lone Star Contract increased $2,326 or 11.1% from
the first six months of fiscal 1998 to the first six months of fiscal 1999. For
each of the six month periods ended March 31, 1999 and 1998 gas purchases
comprised 58.5% of gas sales. From 1998 to 1999 the gross margin increased
$1,691 or 11.4%. For both periods being compared the gross margin percentage
((gas sales - gas purchases) as a percentage of gas sales) remained at 41.5%.
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 six months ended March 31, 1999, the Company realized a
negative gross margin of $607 on this contract versus a negative gross margin of
$855 for the six months ended March 31, 1998. The negative margins resulted
because the spot (market) prices paid by the Company for gas, plus hedging
adjustments where applicable, exceeded the fixed price received by the Company
from MGNG under the contract. The Company has hedged all of its remaining gas
purchase requirements for this contract. As a result, the Company expects to
realize a negative gross margin on this contract during its remaining term,
April 1, 1999 to May 31, 1999.
Both the Lone Star Contract and the MGNG contract expire May 31, 1999.
During the six months ended March 31, 1999, the operating income from these
contracts was $10,048 or 121.4% of consolidated operating income. For the six
months ended March 31, 1998, the operating income from these contracts was
$8,336 or approximately 117.1% of consolidated operating income for the period.
The Company does not anticipate replacing these contracts because it sold its
pipeline assets to a subsidiary of Union Pacific Resources Company ("UPRC") in
May 1997 and because it is unlikely that similar profitable long-term contracts
can be negotiated since most gas purchasers buy gas on the spot market. As a
result, once the two contracts end on May 31, 1999, the Company
-16-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
anticipates that its future revenues, operating income and net income will be
reduced. The Company intends to try to replace some or all of its operating
income contribution of these contracts with operating income from additional
exploration and production and other energy assets. In that respect, the Company
has entered into an agreement to acquire the oil and gas assets of AmBrit Energy
Corp., has entered into a drilling venture in South Texas and has an option to
acquire a drilling concession participation in Romania (see Note 8). There can,
however, be no assurance the Company will succeed in these efforts.
General and Administrative
General and administrative costs increased $118 from $38 for the six
months ended March 31, 1998 to $156 for the six months ended March 31, 1999. The
increase was attributable to increased legal costs and increased consulting fees
for on-going gas marketing operations.
Transportation
Transportation expense increased $93 or 10.8% from $860 for the six
months ended March 31, 1998 to $953 for the six months ended March 31, 1999.
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 UPRC in May 1997. Deliveries to Lone Star were approximately 11%
greater during the six months ended March 31, 1999 than during the six months
ended March 31, 1998. Such expense will cease upon expiration of the Lone Star
Contract on May 31, 1999.
EXPLORATION AND PRODUCTION
Revenues
Oil and Gas Sales
Oil and gas sales decreased $248 or 20.3% from the first six months of
fiscal 1998 to the first six months of fiscal 1999. Approximately half of the
decrease is attributable to decreased production. The other half of the decrease
is primarily due to decreased prices received for oil and gas. Until February
1999 oil prices have been at or near record lows. Gas prices, although not as
low as oil prices, have been 20%-25% lower than in prior years.
Recently oil prices increased dramatically (in excess of $18.00 per
barrel) and gas prices also increased significantly. If such prices remain at
their current levels, the Company's revenue from oil and gas sales is expected
to increase despite depletion of oil and gas reserves. There can be no
assurance, however, that oil and gas prices will remain at their recent levels.
Well Operations
Revenue from well operations increased $62 or 53.9% from the first six
months of fiscal 1998 to the first six months of fiscal 1999. The increase was
primarily caused by the non-recurring recovery of operating fees in 1999 that
had been written off in prior years.
-17-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Expenses
Oil and Gas Production
Oil and gas production expenses increased $133 or 38.2% from the first
six months of fiscal 1998 to the first six months 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. The Company expects that, although such
oil and gas production expense will increase as a result of its new drilling and
acquisition activities, such expenses will decline when compared to oil and gas
sales given the lower production costs typically associated with new production.
There can be no assurance, however, that such will be the case.
General and Administration
General and administrative costs increased $89 or 29% from the first
six months of fiscal 1998 to the first six months of fiscal 1999. The increase
was attributable to increased employee salaries, legal costs and consultant
fees.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $178 or 54.4% from
the first six months of fiscal 1998 to the first six months of fiscal 1999. The
decrease is attributable to decreased production.
As a result of the full cost accounting required to record the
Company's sale of 84% of its proved reserves to UPRC in May 1997, the Company's
cost per equivalent mcf produced thereafter is approximately $.37. Current
acquisition costs for natural gas on the open market are significantly higher
than this. As described in Note 8, the Company recently entered into an
agreement to acquire the oil and gas assets of AmBrit Energy Corp. The
anticipated closing date is June 1, 1999. The Company has also entered into a
drilling venture to drill twelve wells in South Texas and has acquired an option
to invest approximately $3,500 in a drilling concession in Romania. Accordingly,
the Company expects that its oil and gas revenues and expenses will increase to
the extent these planned transactions are consummated. Since the Company's
natural gas marketing contracts expire May 31, 1999, the Company anticipates
that all of its revenues and expenses thereafter will be derived from the
aforementioned oil and gas exploration and production acquisitions, and the
Company's own production. The Company may, however, decide to enter into another
segment of the energy business.
-18-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE
Corporate general and administrative expenses increased $323 or 20.6%
from the first six months of fiscal 1998 to the first six months of fiscal 1999.
Most of the increase was caused by increased consulting fees applicable to 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 $286 or 23.2% from the first six months of
fiscal 1998 to the first six months of fiscal 1999. The decrease is primarily
attributable to a decrease in the average balance of unrestricted cash
outstanding during the periods being compared. In addition, the interest rate
applicable to the Company's investment has decreased almost one-half of one
percent since March 31, 1998.
Other Income (Expense)
The composition of other income (expense) is as follows:
Six Months Ended March 31,
1999 1998
----------- ----------
Write downs of preferred stock investment in
Penn Octane........................................ ($423)
Market price adjustment - common stock of Penn
Octane............................................. 104
Litigation recovery - EMC............................. 355
Miscellaneous......................................... (2) $29
----- ---
$ 34 $29
===== ===
The write down of the Company's investment in Penn Octane stock is based
upon the Company's calculation of the loss that would be incurred if the Company
converted its shares of Penn Octane preferred stock and sold the resulting
common shares at a discount to the market price given the volume of shares that
would be sold (see Note 7).
The market price adjustment relates to the Company's investment in Penn
Octane common stock and is essentially a reversal of the market provision made
at September 30, 1998 when the market value of the stock was less than the
Company's cost.
-19-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
TAX PROVISION
The tax provision for the six months ended March 31, 1998 essentially
represents the amortization of the Company's deferred tax assets at an effective
rate of 36% of pre-tax income. The tax provision for the six months ended March
31, 1999 consists of three components:
a. The realization of the remaining $2,765 deferred tax assets at
an effective rate of 36% on $7,681 of pre-tax income.
b. A tax provision of 2% on all pre-tax income in excess of $7,681.
For the six months ended March 31, 1999, such excess pre-tax
income was $1,578. The 2% rate represents alternative minimum
Federal corporate taxes the Company must pay despite having tax
carryforwards available to offset regular Federal corporate tax.
c. Other tax adjustments of $13.
-20-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
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 six months ended March 31, 1999, the Company generated
$13,994 from operating activities. During the same period the Company invested
$301 in oil and gas drilling and paid $881 in stockholder dividends. At March
31, 1999, the Company had $43,845 of unrestricted cash, $44,101 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 - in
addition to its drilling expectations for up to seventy
additional wells in Appalachia (approximately $5,250), twelve
exploratory wells in South Texas ($5,300), anticipated new
drilling on the properties to be acquired from AmBrit ($5,300)
and possibly several exploratory wells in Romania ($3,500), the
Company is currently pursuing several other 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 investments overseas. Although the Company believes it
can conclude a transaction or several transactions on terms
favorable to the Company, there can be no assurance that such
will be the case. Oil and gas prices have recently increased
significantly and many potential sellers may decide not to sell
or may not be forced to sell by their lenders. In addition,
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 April 30, 1999, the Company
had repurchased 4,202,617 of its shares of common stock at a
cost of $59,359. The Company's Board of Directors 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 and/or to increase the repurchase
authorization above 4,250,000 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.
-21-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
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.
An estimate of the Company's expected cash resources and obligations
from April 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 - April 1, 1999.......................................................... $43,845
Cash flow - remaining gas marketing and ongoing exploration and
production operations............................................................. 3,200
Cash flow - oil and gas operations to be acquired..................................... 2,400
Repayment of Penn Octane Corporation note............................................. 100
Proceeds from American Western note................................................... 800
Interest.............................................................................. 850
-------
51,195
-------
Expected Cash Obligations:
Acquisition of oil and gas properties of AmBrit....................................... 19,500
Drilling Ventures:
Appalachia........................................................................ 400
South Texas....................................................................... 2,000
Romania........................................................................... 500
AmBrit properties - new drilling...................................................... 500
Quarterly dividends................................................................... 780
Assumed IRLP payment of vendors and funding of
environmental reserves............................................................ 800
-------
24,480
-------
Excess of Expected Cash Resources Over Expected Cash Obligations......................... $26,715
=======
</TABLE>
The foregoing estimates assume that the AmBrit Energy Corp. transaction
is consummated, that drilling operations commence in the South Texas drilling
venture and that the Romanian option is exercised and related concession
operations proceed as planned. Obviously, such may not be the case. Completion
of these transactions is dependent upon several risk factors, including those
listed below.
In addition to the foregoing, the Company anticipates additional
drilling expenditures of as much as $15,650 for the period from October 1, 1999
to September 30, 2002 assuming all planned transactions are consummated. Such
amounts are preliminary estimates only and the actual drilling costs spent
during this period may vary materially from those estimated. The Company has
also
-22-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
assumed certain energy prices for its production. Factors affecting energy
prices are beyond the control of the Company and actual prices will be different
than the prices assumed by the Company.
In the event that the Company decides to acquire additional energy
assets but does not have sufficient corporate cash to do so, the Company intends
to draw-down funds from its $30,000 line of credit with an energy bank. That
line of credit is unused.
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. Foreign operation risks. Since the Company may spend approximately
$3,500 drilling a Romanian concession, the Company's interests are
subject to certain foreign country risks over which the Company
has no control - including political risk, the risk of additional
taxation and the possibility that foreign operating requirements
and procedures may reduce estimated profitability.
k. 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.
The Company has recently completed a study of the Year 2000 issue and
related risks. As a result of the study, the Company 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 March 31, 1999, $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.
-23-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
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 oil/gas 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.
-24-
<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Item III. Qualitative and Quantitative Disclosures about Market Risk
One of the Company's subsidiaries has hedged all of the gas it must
purchase for the remaining term of the Lone Star Contract and the contract with
MGNG. The subsidiary used fixed price swaps to hedge such gas. The subsidiary
purchases gas on the open market and pays the trading party if the market price
is below the fixed price or is paid by the trading party if the market price
exceeds the fixed price. The result is that the Company's subsidiary has
essentially fixed the price of future gas purchases and is not subject to
commodity price risk related to its gas marketing activities. The Company's gas
marketing contracts expire May 31, 1999.
See Note 6 to the Consolidated Financial Statements.
-25-
<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 March 31, 1999 financial statements included in
Part I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 10.126 - Purchase and Sale Agreement by and
between AmBrit Energy Corp. and Castle
Exploration Company, Inc., effective
January 1, 1999
Exhibit 10.127 Agreement to Exchange $.9 Million
Secured Notes Into Senior Preferred
Stock of Penn Octane Corporation dated
March 3, 1999
Exhibit 11.1 - Statement re: Computation of Earnings
Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-26-
<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: May 17, 1999 CASTLE ENERGY CORPORATION
/s/Richard E. Staedtler
-----------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-27-
<PAGE>
Exhibit 10.127
Agreement To Exchange $0.9 Million Secured Notes Into
Senior Preferred Stock of Penn Octane Corporation (the "Exchange")
Issuer: Penn Octane Corporation ("POCC")
Purchaser: Castle Energy Corporation (CEC), currently a holder of
$1.0 Million Secured Notes of POCC (the "Notes") pursuant
to a Rollover and Assignment Agreement dated December 1,
1998.
The Transaction: POCC will issue CEC 90,000 shares of its Senior Preferred
Stock (the "Preferred Stock") at a price of $10.00 per
share (total value $0.9 million) in exchange for
cancellation of $0.9 Million of the Notes held by CEC.
After the transaction, CEC will still hold $.10 million of
the Notes, including any accrued and unpaid interest
thereon.
In addition to the issuance of the Preferred Stock, CEC
will also receive 50,000 shares of common stock of POCC.
In the event that POCC does not exercise its right to call
the Preferred Stock on or before September 3, 1999, then
CEC will be entitled to receive additional 50,000 shares
of common stock of POCC.
Dividend rate: The holders of the Preferred Stock will receive a 12.0%
annual cash or pay-in-kind dividend, payable
semi-annually.
Conversion Rate: The holders of the Preferred Stock will be entitled at any
time to convert the Preferred Stock, all or in part,
including any accrued and unpaid dividends, into shares of
POCC Common Stock, at a conversion ratio of one share of
Preferred Stock for 4.0 shares of common stock of POCC.
Call Feature: POCC may repurchases the Preferred Stock, all or in part,
at any time, after providing 5 days written notice to CEC.
If during the 5 day period, CEC does not elect to convert
the Preferred Stock which is being called by POCC, all or
in part, then POCC may repurchase the requested amount of
Preferred Stock, for an amount equal to all principal and
accrued and unpaid dividends, less any portion which may
have been elected to be converted by CEC pursuant to
POCC's notice. POCC will be required to pay the amounts
required within 5 days from the expiration of the original
5 days written notice period provided to CEC. POCC is not
required to purchase any amount originally offered for
repurchase which subsequently is reduced due to CEC's
conversion of any portion of the Preferred Stock held by
CEC. In the event that POCC does not provide the funds as
prescribed herein, then POCC will be required to issue CEC
50,000 additional shares of common stock of POCC for each
month the payment is delayed.
<PAGE>
Term Sheet - Exchange Of Notes
Page 2 of 2
March 1, 1999
Collateral: $0.9 Million of the Notes which are being exchanged shall
be released from any security and escrow agreements
previously entered into in connection with the Rollover
and Assignment Agreement.
Anti-Dilution: Standard anti-dilution provision, including protection
from stock splits, stock dividends and distribution of
assets.
Voting: The Preferred Stock is non-voting.
Closing Date: The exchange is effective as of March 3, 1999. Both
parties agree to expedite the necessary paperwork related
to the issuance of the Preferred Stock and cancellation of
$0.9 million of the Notes.
Governing Law: Should any portion of this agreement be deemed to be
invalid, then the parties agree that the terms shall be
modified so that the intention of the parties is
maintained.
AGREED TO BY:
- -------------
PENN OCTANE CORPORATION
- ---------------------------------------
Jerome B. Richter
Chairman of the Board,
President and Chief Executive Officer
CASTLE ENERGY CORP.
- ---------------------------------------
Joseph Castle
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
Exhibit 11.1
(1 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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 4,715,546 4,715,546
Purchase of treasury stock (weighted) (112,496) (112,496) (571,417) (571,417)
---------- ---------- ---------- ----------
2,828,233 2,828,233 4,144,129 4,144,129
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 43,734 37,115
---------- ---------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 2,828,233 2,871,967 4,144,129 4,181,244
========== ========== ========== ==========
IV. Net Income $ 3,938 $ 3,938 $ 2,542 $ 2,542
========== ========== ========== ==========
V. Net Income Per Share $ 1.39 $ 1.37 $ .61 $ .61
========== ========== ========== ==========
</TABLE>
<PAGE>
Exhibit 11.1
(2 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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 4,713,546 4,713,546
Purchase of treasury stock (weighted) (55,808) (55,808) (280,683) (280,683)
Options exercised (weighted) 1,500 1,500
---------- ---------- ---------- ----------
2,884,921 2,884,921 4,434,363 4,434,363
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 51,203 31,404
---------- ---------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 2,884,921 2,936,124 4,434,363 4,465,767
========== ========== ========== ----------
IV. Net Income $ 6,449 $ 6,449 $ 5,364 $ 5,364
========== ========== ========== ==========
V. Net Income Per Share $ 2.24 $ 2.20 $ 1.21 $ 1.20
=========== ========== ========== ==========
</TABLE>
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (Agreement), dated as of April 12, 1999, is by
and among AMBRIT ENERGY CORP., a Delaware corporation, whose address is 8080
North Central Expressway, Suite 750, Dallas, Texas 75206, (hereinafter referred
to as "Seller") and Castle Exploration Company, Inc. a Pennsylvania corporation
(herein referred to as "Buyer"), whose address is 531 Plymouth Meeting Road,
Plymouth Meeting, Pennsylvania 19462. Seller and Buyer are sometimes together
referred to herein as "Parties".
W I T N E S S E T H:
WHEREAS, Seller owns certain oil and gas leasehold interests and
related assets more fully described on the exhibits hereto; and
WHEREAS, Seller desires to sell and Buyer desires to acquire these
interests and related assets on the terms and conditions hereinafter provided;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, Seller and Buyer hereby agree as follows:
ARTICLE 1. DEFINITIONS
1.1 "Agreement" shall mean this Purchase and Sale Agreement between
Seller and Buyer.
1.2 "AmBrit/United Lawsuit" shall mean Cause No. 98-10318 entitled
"AmBrit Energy Corp. vs. United Oil & Minerals, Inc." currently pending in the
201st Judicial District Court of Travis County, Texas, and which may be moved to
the District Court of Lavaca County, Texas, and given a new cause number
pursuant to a Motion to Transfer Venue currently pending in such cause.
1.3 "Assets" shall mean the following described assets and properties
(except to the extent constituting Excluded Assets):
(a) the Leases;
(b) Wells;
(b) the Personal Property and Incidental Rights; and
(c) the Hydrocarbons
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<PAGE>
1.4. "Assumed Obligations" shall mean except as otherwise provided in
Section 16.3 and 16.4 below
(a) all Environmental Obligations and/or Liabilities; and
(b) all liabilities, duties, and obligations that arise on or after the
Effective Time from ownership or operation of the Assets, including, but not
limited to: (i) all liabilities and obligations of Seller from and after the
Effective Time until Closing and of Buyer on or after Closing, with respect to
compliance with all applicable rules, regulations, statutes, permits and orders,
including, but not limited to, plugging, replugging and abandoning any wells,
the restoration of any well sites, tank battery sites and gas plant sites, the
proper removal, disposal and abandonment of any wastes or fixtures, and the
proper capping and burying of all flow lines, which are included in the Assets;
(ii) all duties, liabilities and obligations arising on or after the Effective
Time under any contract or agreement affecting the Assets in existence at the
Effective Time, including those items listed on Exhibit A-2, and all obligations
and benefits with respect to gas production, sales or processing imbalances with
third parties; (iii) all duties, liabilities, and obligations that arise under
the Leases, assignments in the chain of title of the Leases, and burdens on
production; and (iv) all other duties, liabilities, and obligations assumed by
Buyer under this Agreement.
1.5. "Closing" shall be as defined in Section 12.1.
1.6. "Closing Date" shall be as defined in Section 12.1.
1.7. "Effective Time" shall mean 7:00 a.m., local time, on January 1,
1999.
1.8. "Environmental Obligations or Liabilities" shall mean all
liabilities, obligations, expenses (including, without limitation, all
attorneys' fees), fines, penalties, costs, claims, suits or damages (including
natural resource damages) of any nature, including personal injury, illness,
disease, or wrongful death, associated with the Assets and attributable to or
resulting from: (i) pollution or contamination of soil, groundwater or air, on
the Assets and any other contamination of or adverse effect upon the
environment, (ii) underground injection activities and waste disposal onsite,
(iii) clean-up responses, remedial, control or compliance costs, including the
required cleanup or remediation of spills, pits, ponds, or lagoons, including
any subsurface or surface pollution caused by such spills, pits, ponds, or
lagoons, (iv) noncompliance with applicable land use, permitting, surface
disturbance, licensing or notification requirements, and (v) violation of any
federal, state or local environmental or land use law.
2
<PAGE>
1.9. "Excluded Assets" shall mean the following:
(a) (i) all trade credits, accounts receivable, notes receivable and
other receivable attributable to Seller's interest in the Assets with respect to
any period of time prior to the Effective Time; (ii) all deposits, cash, checks
in process of collection, cash equivalents and funds attributable to Seller's
interest in the assets with respect to any period of time prior to the Effective
Date; (iii) all proceeds, benefits, income or revenues accruing (and any
security or other deposits made) with respect to the Assets prior to the
Effective Time; and (iv) all revenues deposited into the registry of the Court,
plus any interest associated therewith, in connection with the AmBrit/United
Lawsuit with respect to any period of time prior to the Effective Date.
(b) all corporate, financial, and tax records of Seller; however, Buyer
shall be entitled to receive copies, of any tax records which directly relate to
any Assumed Obligations, or which are necessary for Buyer's ownership,
administration, or operation of the Assets;
(c) all claims and causes of action of Seller arising from acts,
omissions or events, or damage to or destruction of the Assets, occurring prior
to the Effective Time;
(d) except as otherwise provided in Article 14, all rights, titles,
claims and interests of Seller, with respect to any period prior to the
Effective Time, (i) under any policy or agreement of insurance or indemnity;
(ii) under any bond; or (iii) to any insurance or condemnation proceeds or
awards;
(e) all Hydrocarbons produced from or attributable to the Assets with
respect to all periods prior to the Effective Time, together with all proceeds
from or of such Hydrocarbons;
(f) claims of Seller for refund of or loss carry forwards with respect
to production, windfall profit, severance, ad valorem or any other taxes
attributable to any period prior to the Effective Time, or income or franchise
taxes;
(g) all amounts due or payable to Seller as adjustments or refunds
under any contracts or agreements (including take-or-pay claims) and affecting
the Assets, respecting periods prior to the Effective Time;
(h) all amounts due or payable to Seller as adjustments to insurance
premiums related to the assets with respect to any period prior to the Effective
Time;
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<PAGE>
(i) all proceeds, benefits, income or revenues accruing (and any
security or other deposits made) with respect to the Assets, and all accounts
receivable attributable to the Assets, prior to the Effective Time;
(j) all of Seller's intellectual property, including, but not limited
to, proprietary computer software, patents, trade secrets, copyrights, names,
marks and logos;
1.10. "Hydrocarbons" shall mean crude oil, natural gas, casinghead gas,
condensate, sulphur, natural gas liquids and other liquid or gaseous
hydrocarbons (including C02), and shall also refer to all other minerals of
every kind and character which may be covered by or included in the Leases and
Assets.
1.11. "Leases" shall mean, except to the extent constituting Excluded
Assets, any and all interests owned by Seller and set forth on Exhibit A, or
which Seller is entitled to receive by reason of any participation, joint
venture, farm-in, farm- out, joint operating agreement or other agreement, in
and to the oil, gas and/or mineral leases, permits, licenses, concessions,
leasehold estates, royalty interests, overriding royalty interests, net revenue
interests, executory interests, net profit interests, working interests,
reversionary interests, fee and term mineral interests, and any other interests
of Seller in Hydrocarbons, it being the intent hereof that the legal
descriptions and depth limitations set forth on Exhibit A, are for information
only and the term "Leases" includes all of Seller's right, title and interest in
the interests described on Exhibit A even though such interests may be
incorrectly described.
1.12. "Performance Deposit" shall be as defined in Section 3.2.
1.13. "Personal Property and Incidental Rights" shall mean all right,
title and interest of Seller in and to or derived from the following insofar as
the same do not constitute Excluded Assets and are assignable and are
attributable to, appurtenant to, incidental to, or used for the operation of the
Leases:
(a) all easements, rights-of-way, permits, licenses, servitudes or
other interests;
(b) all equipment and other personal property, inventory, spare parts,
tools, fixtures, pipelines, salt water disposal wells, platforms, tank
batteries, appurtenances, and improvements situated upon the Leases and used or
held for use in connection with the development or operation of the Leases or
the production, treatment, storage, compression, processing or transportation of
Hydrocarbons from or in the Leases;
(c) all contracts, agreements, and title instruments to the extent
attributable to and affecting the Assets in existence at Closing, including all
Hydrocarbon sales,
4
<PAGE>
purchase, gathering, transportation, treating, marketing, exchange, processing,
and fractionating contracts, and joint operating agreements; and
(d) originals of all lease files, land files, well files, production
records, division order files, abstracts, title opinions, and contract files,
insofar as the same are directly related to the Leases; including, without
limitation, all seismic, geological, geochemical, and geophysical information
and data, to the extent that such data is not subject to any third party
restrictions, but excluding Seller's proprietary interpretations of same.
1.14. "Purchase Price" shall be as defined in Section 3.1.
ARTICLE 2. AGREEMENT TO PURCHASE AND SELL
Subject to the terms and conditions of this Agreement, Seller agrees to
sell and convey to Buyer and Buyer agrees to purchase and pay for the Assets and
to assume the Assumed Obligations.
ARTICLE 3. PURCHASE PRICE AND PAYMENT
3.1. Purchase Price.
Subject to adjustment as set forth below, the Purchase Price for the
Assets shall be TWENTY-TWO MILLION DOLLARS ($22,000,000.00) allocated among the
Assets as provided in Exhibit B.
3.2. Performance Deposit. Immediately upon the execution hereof, Buyer
shall tender to Seller, by bank wire transfer, a Performance Deposit equal to
ten percent (10%) of the Purchase Price.
3.3. Proration of Production and Expenses and Final Accounting.
(a) The conveyance from Seller shall be effective as of 7:00 a.m.,
January 1, 1999, local time where the Properties are located ("Effective Date");
(b) All production from the Assets and all proceeds from the sale of
production prior to the Effective Date shall be the property of Seller. All
production and proceeds attributable to production after the Effective Date
shall be the property of Buyer. Seller shall be responsible for payment of all
expenses attributable to the Assets prior to the Effective Date. Buyer shall be
responsible for payment of all expenses attributable to the Assets after the
Effective Date.
5
<PAGE>
(c) All expenses associated with the AmBrit/United Lawsuit prior to the
Effective Time shall be the responsibility of Seller and all expenses associated
with the AmBrit/United Lawsuit after the Effective Time shall be the
responsibility of Buyer;
(d) An accounting for net proceeds from production less applicable
expenses and for oil and/or condensate in inventory, in storage or in the fill
line will be prepared by Seller and delivered to Buyer not later than ninety
(90) days after Closing and the parties shall adjust the Purchase Price further
accordingly;
(e) The accounting provided for at subparagraphs (b) and (c) above (the
"Final Accounting") shall reflect that Seller shall be entitled to receive from
Buyer the aggregate of:
(i) all severance and excise taxes paid directly by Seller on Buyer's
oil and gas;
(ii) all costs and expenses associated with the AmBrit/United Lawsuit
on and after the Effective Time for which Seller has paid;
(iii) all costs and expenses associated with the operation of the
Assets on and after the Effective Date for which Seller has paid,
including $25,000 per month as reimbursement for overhead
expenses;
(iv) property and/or ad valorem taxes for 1999 assessed against the
Properties allocable to the time period after the Effective Date,
if such taxes have been paid directly by Seller
(v) the value (which shall be determined by the actual posted field
prices plus any bonuses applicable for each well as of the
Effective Date) of all merchantable oil and/or condensate in
storage or in the line fill on or off the Properties as of the
Effective Date, less applicable taxes and gravity adjustments
deducted by the Buyers thereof.
(f) The Final Accounting provided for at subparagraphs 3.4(b), 3.4(c)
and 3.4(d) above shall reflect that Buyer shall be entitled to receive from
Seller the aggregate of:
(i) The amounts received by Seller for Hydrocarbons produced and
saved from the Properties after the Effective Date, and for which
Seller has received run checks; and
(ii) Any insurance proceeds paid to Seller because of damage to or
destruction of the Properties, or any part thereof, on or after
the Effective Date; and
(iii) net copas reveues earned by Seller after the Effective Date.
6
<PAGE>
(g) The sum due to Seller according to paragraph 3.4(e) above shall be
compared to the sum due to Buyer according to paragraph 3.4(f) above. The
smaller of these two sums shall be deducted from the larger thereof, and net
amount remaining after such deduction shall be due immediately, in cash, to
either Seller or Buyer, as the case may be. The resolution and payment of the
Final Accounting shall be made within ninety (90) days after the Closing Date.
(h) Seller shall prepare and deliver to Buyer, at least five (5)
business days prior to Closing, Seller's estimate of the adjusted Purchase Price
to be paid at Closing, together with a preliminary statement setting forth
Seller's estimate of the amount of each adjustment to the Purchase Price to be
made pursuant to this Section 3.4. The Parties shall negotiate in good faith and
attempt to agree on such estimated adjustments prior to Closing. In the event
any estimated adjustment amounts are not agreed upon prior to Closing, the
estimate of the adjusted Purchase Price for purposes of Closing shall be
calculated based on Seller's and Buyer's agreed upon estimated adjustments and
Seller's good faith estimate of any disputed amounts. Seller agrees that it will
keep an amount equal to any amount in dispute after Final Closing in an interest
bearing escrow account until September 1, 1999, the Final Accounting Date (90
days after the Closing Date). Interest earned on the escrow account will be
divided proportionately between Buyer and Seller . Should there not be any
matter in dispute after Final Closing, all monies in said escrow account, plus
interest, if any will be credited to Seller. The Parties agree that any dispute
that cannot be settled in good faith will be settled in accordance with the
Arbitration procedures as set out in Article 18. hereof.
3.4. Buyer agrees to take Seller's position in the AmBrit/United
Lawsuit, and will assume all liabilities, duties and obligations that arise on
or after the Effective Time from ownership of the Assets and associated with the
AmBrit/United Lawsuit. Buyer agrees to pay Seller all proceeds from production,
plus interest earned thereon, it actually receives for all time periods on or
prior to the Effective Date.
ARTICLE 4. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer as of the date hereof, and the
Closing Date that:
(a) Seller is a Delaware corporation duly organized, validly existing,
and in good standing under the laws of the state of Delaware, and is duly
qualified to carry on its business in those states where it is required to do
so;
7
<PAGE>
(b) Subject to the approval by Seller's parent's (United Energy plc)
shareholders, Seller has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, and to perform it obligations
under this Agreement and the other documents and agreements contemplated hereby.
The consummation of the transactions contemplated by this Agreement will not
violate, nor be in conflict with, any provision of its governing documents or
any agreement or instrument to which it is a party or by which it is bound
(except any provision contained in agreements customary in the oil and gas
industry relating to (i) the preferential right to purchase all or any portion
of the Assets; (ii) required consents to transfer and related provisions; (iii)
maintenance of uniform interest provisions; and (iv) any other third-party
approvals or consents contemplated herein), or any judgment, decree, order,
statute, rule, or regulation applicable to Seller;
(c) This Agreement, and all documents and instruments required
hereunder to be executed and delivered by Seller at Closing, constitute legal,
valid and binding obligations of Seller in accordance with its respective terms,
subject to applicable bankruptcy and other similar laws of general application
with respect to creditors;
(d) There are no bankruptcy, reorganization or receivership proceedings
pending, being contemplated by, or to the actual knowledge of Seller threatened
against Seller;
(e) The execution, delivery and performance of this Agreement and the
transaction contemplated hereunder have been duly and validly authorized by all
requisite authorizing action, corporate, partnership or otherwise, on the part
of Seller; and
(f) Seller has not incurred any obligation or liability, contingent or
otherwise, for brokers' or finders' fees in connection with this Agreement, and
the transaction provided herein, which will be the responsibility of Buyer, any
such obligation or liability that might exist shall be the sole obligation of
Seller;
(g) There are no claims, demands, actions, suits, proceedings
(including condemnation, expropriation, or forfeiture proceedings) or
governmental investigations or inquiries pending, or to the knowledge of Seller
threatened, against Seller, or any Asset (i) seeking to prevent the consummation
of the transactions contemplated hereby, or (ii) which, singly or in the
aggregate, would have a material adverse effect the Assets.
8
<PAGE>
ARTICLE 5. BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to Seller as of the date hereof, and the
Closing Date that:
(a) Buyer is a corporation duly organized, validly existing, and in
good standing under the laws of the state of Pennsylvania and is duly qualified
to carry on its business in those states where it is required to do so;
(b) Buyer has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, and to perform it obligations
under this Agreement and the other documents and agreements contemplated hereby.
The consummation of the transactions contemplated by this Agreement will not
violate, nor be in conflict with, any provision of Buyer's articles of
incorporation, partnership agreement(s), by-laws or governing documents or any
material agreement or instrument to which it is a party or by which it is bound,
or any judgment, decree, order, statute, rule, or regulation applicable to
Buyer;
(c) the execution, delivery and performance of this Agreement and the
transactions contemplated hereunder have been duly and validly authorized by all
requisite authorizing action, corporate, partnership or otherwise, on the part
of Buyer;
(d) this Agreement, and all documents and instruments required
hereunder to be executed and delivered by Buyer at Closing, constitute legal,
valid and binding obligations of Buyer in accordance with their respective
terms, subject to applicable bankruptcy and other similar laws of general
application with respect to creditors;
(e) there are no bankruptcy, reorganization or receivership proceedings
pending, being contemplated by, or to the actual knowledge of Buyer threatened
against Buyer;
(f) Buyer has not incurred any obligation or liability, contingent or
otherwise, for brokers' or finders' fees in connection with this Agreement, and
the transaction provided herein, which will be the responsibility of Seller and
any such obligation or liability that might exist shall be the sole obligation
of Buyer;
(g) Buyer is an experienced and knowledgeable investor and operator in
the oil and gas business. Prior to entering into this Agreement, Buyer was
advised by and has relied solely on its own expertise and legal, tax, reservoir
engineering, and other professional counsel concerning this Agreement, the
Assets and the value thereof;
9
<PAGE>
(h) Buyer has arranged to comply with all applicable laws, ordinances,
rules and regulations and shall promptly obtain all material permits required by
public authorities to allow Buyer to own and operate, as the case may be, the
Assets purchased; and
(i) Buyer has sufficient cash, available lines of credit or other
sources of immediately available funds to enable it to pay the Purchase Price,
as adjusted herein, at Closing.
ARTICLE 6. ACCESS TO INFORMATION AND INSPECTIONS
6.1. Title Files.
Promptly after the execution of this Agreement and until the Closing
Date, Seller shall permit Buyer and its representatives at reasonable times
during normal business hours to examine, in Seller's offices at their actual
location, all abstracts of title, title opinions, title files, ownership maps,
lease files, assignments, division orders, payout statements and agreements
pertaining to the Assets as requested by Buyer, insofar as the same may now be
in existence and in the possession of Seller. No warranty of any kind is made by
Seller as to the information so supplied, and Buyer agrees that any conclusions
drawn therefrom are the result of its own independent review and judgment.
6.2. Other Files.
Promptly after the execution of this Agreement and until the Closing
Date, Seller shall permit Buyer and its representatives at reasonable times
during normal business hours to examine, in Seller's offices at their actual
location, all production, well, regulatory, engineering, seismic, geological,
geophysical and geochemical information, and other information, files, books,
records, and data pertaining to the Assets as requested by Buyer, insofar as the
same may now be in existence and in the possession of Seller, excepting economic
evaluations, reserve reports and any such information that is subject to the
attorney/client and work product privileges. No warranty of any kind is made by
Seller as to the information so supplied, and Buyer agrees that any conclusions
drawn therefrom are the result of its own independent review and judgment.
6.3. Confidentiality Agreement.
All such information made available to Buyer shall be maintained
confidential by Buyer until Closing. Any confidentiality agreements Buyer has
previously executed with Seller with respect to the Assets shall continue in
force until Closing, at which time such agreement shall terminate. Buyer shall
further take whatever reasonable steps which may be necessary to ensure that
Buyer's employees, consultants and agents comply with the provisions of this
Section 6.3.
10
<PAGE>
6.4. Inspections.
Promptly after the execution of this Agreement and until Closing,
Seller, subject to any necessary third-party operator approval, shall permit
Buyer and its representatives at reasonable times and at their sole risk, cost
and expense, to conduct reasonable inspections of the Assets.
6.5 No Warranty or Representation on Seller's Information.
SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH
RESPECT TO THE ACCURACY, COMPLETENESS, OR MATERIALITY, OF THE INFORMATION,
RECORDS, AND DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO BUYER IN
CONNECTION WITH THE ASSETS OR THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
DESCRIPTION OF THE ASSETS, QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF ANY,
PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, GAS BALANCING
INFORMATION, ALLOWABLES OR OTHER REGULATORY MATTERS, POTENTIAL FOR PRODUCTION OF
HYDROCARBONS FROM THE ASSETS, OR ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM
ANY OTHER MATERIAL FURNISHED TO BUYER BY SELLER. ANY AND ALL SUCH DATA,
INFORMATION AND MATERIAL FURNISHED BY SELLER IS PROVIDED AS A CONVENIENCE ONLY
AND ANY RELIANCE ON OR USE OF SAME IS AT BUYER'S SOLE RISK.
ARTICLE 7. ENVIRONMENTAL MATTERS, ADJUSTMENTS AND TERMINATION
7.1. Upon execution of and pursuant to the terms of this Agreement,
Buyer shall have the right, at reasonable times during normal business hours, to
conduct its investigation into the status of the physical and environmental
condition of the Assets. If, in the course of conducting such investigation,
Buyer discovers significant Environmental Obligations or Liabilities which
materially affect the Assets, Buyer may, no later than May 18, 1999, notify
Seller in writing specifying such defects, the Assets affected thereby, and
Buyer's good faith estimate of the net reduction in value of the Assets affected
by such defects.
7.2. If Buyer fails to notify Seller prior to the close of business on
May 18, 1999, of any such defects, all defects will be deemed waived, Seller
shall be released from any liability therefor, the Parties shall proceed with
Closing, Seller shall be under no obligation to correct the defects, and Buyer
shall assume the risks, liability and obligations associated with such defects.
If Buyer notifies Seller of the defects in a timely manner as set out in Article
7.1 and if such defects are in Seller's opinion capable of being corrected prior
to the Closing Date, Seller may, but shall be under no obligation to, correct at
its own cost and expense such defects on or before the Closing Date.
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<PAGE>
7.3. If Seller elects not to correct the defects prior to Closing, and
the net reduction in value of the Assets affected by such defects exceeds ten
percent (10%) of the purchase price, either Buyer or Seller shall have the right
to terminate this Agreement by so notifying the other party in writing. Upon
such termination, Seller shall return the Performance Deposit to Buyer without
interest within ten (10) days of receipt of the notice of termination and
neither party shall have any further obligations or liability hereunder.
Otherwise, Closing shall occur and Seller shall make a reasonable effort to
correct the defects within ninety (90) days of Closing or the Parties shall
agree to a reduction in the Purchase Price and the Buyer shall assume such
defects. The Parties agree that any dispute that cannot be settled in good faith
will be settled in accordance with the Arbitration procedures as set out in
Article 18. hereof.
ARTICLE 8. TITLE DEFECTS, TERMINATION AND ADJUSTMENTS
8.1. Definitions. For purposes hereof, the terms set forth below shall
have the meanings assigned thereto.
(a) "Defensible Title", subject to and except for the Permitted
Encumbrances (as hereinafter defined), means that Seller has such title that:
(i) entitles Seller to receive not less than the net revenue
interest shown on Exhibit B of all oil and gas produced, saved
and marketed from or attributable to the well or unit
indicated;
(ii) obligates Seller to bear the costs and expenses relating
to the maintenance, development and operation of such well or
unit in an Amount not greater than the expense interest of
Seller set forth in Exhibit B (unless Seller's net revenue
interest therein is proportionately increased); and
(iii) the Assets are free and clear of any liens, burdens or
encumbrances of any kind or character.
(b) "Title Defect" shall mean any matter which causes Seller to have
less than Defensible Title to any of the Assets as of the Closing Date.
(c) "Title Defect Property" shall mean any Lease or portion thereof
burdened by a Title Defect.
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(d) "Permitted Encumbrances" shall mean any of the following matters:
(i) any and all disputed interests of Seller in and to
the James Simpson (Pilgreen) lease as set out and
described on Exhibit A related to the period of time
before and including the Effective Date;
(ii) tax liens and mechanic's liens for amounts not yet
due and payable, or those that are being contested in
good faith by Seller in the ordinary course of
business;
(iii) any liens or security interests created by law or
reserved with respect to the Assets for royalty,
bonus, rental, other payment obligations or created
to secure compliance with the terms of the Leases;
(iv) any valid, subsisting and applicable laws, rules and
orders of governmental authority;
(v) to the extent any of the following do not materially
diminish the value of, or impair the conduct of
operations on, any of the Assets and do not impair
Seller's right to receive the revenues attributable
thereto: (x) easements, rights-of-way, servitudes,
permits, surface leases and other rights in respect
of surface operations, pipelines, grazing, hunting,
fishing, logging, canals, ditches, reservoirs or the
like, and (y) easements for streets, alleys,
highways, pipelines, telephone lines, power lines,
railways and other similar rights-of-way, on, over or
in respect of property owned or leased by Seller or
over which Seller owns rights of way, easements,
permits or licenses;
(vi) all lessors' royalties, overriding royalties, net
profits interests, carried interest, production
payments, reversionary interests and other burdens on
or deductions from the proceeds of production if the
net cumulative effect of such burdens or deductions
does not reduce the net revenue interest of Seller in
any well affected thereby as reflected in Exhibit B
or impair the right to receive revenues attributable
thereto;
(vii) to the extent the same do not operate to reduce the
net revenue interest, nor increase the expense
interest (unless Seller's net revenue interest
therein is proportionately increased), of Seller as
reflected in Exhibit B, nor impair the right of
Seller to receive the revenues attributable thereto:
production sales contacts; division orders; contracts
for purchase, exchange, refining, or
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processing of oil, gas and other hydrocarbons;
unitization and pooling designations, declarations,
orders and agreements; operating agreements;
agreements of development; area of mutual interest
agreements; gas balancing or deferred production
agreements; processing agreements; plant agreements;
pipeline, gathering and transportation agreements;
injection, repressuring and recycling agreements;
carbon dioxide purchase or sale agreements; salt
water or other disposal agreements; seismic or
geophysical permits or agreements; and any and all
other agreements which are ordinary and customary in
the oil, gas, sulphur and other mineral exploration,
development or extraction business, or in the
business of processing of gas and gas condensate
production for the extraction of products therefrom;
(viii) all defects, irregularities and encumbrances
affecting the Assets which are not such as to
interfere materially with the operation or use of the
affected part of the Assets, and which do not impair
Buyer's rights to receive the proceeds of production
from the Leases and do not operate to reduce the net
revenue interest, nor increase the working interest
(unless Seller's net revenue interest therein is
proportionately increased), of Seller as reflected in
Exhibit B hereto;
(ix) preferential rights to purchase and required third
party consents to assignments and similar agreements
with respect to which waivers or consents are
obtained from the appropriate parties, or the
appropriate time period for asserting the rights has
expired without an exercise of the rights prior to
the Closing Date;
(x) all rights to consent by, required notices to,
filings with, or other actions by governmental
entities and tribal authorities in connection with
the sale or conveyance of oil and gas leases or
interests if they are customarily obtained subsequent
to the sale or conveyance;
(xi) defects or irregularities of title arising out of
events or transactions which have been barred by
limitations;
(xii) any encumbrance or other matter (whether or not
constituting a "Title "Defect") waived in writing by
Buyer.
(xiii) Aggregate Title Defects having a value of less than
$50,000.
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(e) "Title Defect Value" shall have the meaning set forth in Section
8.5.
8.2. Notice of Title Defects. On or prior to the close of business on
May 18, 1999, Buyer may provide Seller written notice of any Title Defect
Properties along with a description of those matters which, in Buyer's
reasonable opinion, constitute Title Defects and setting forth in detail Buyer's
calculation of the Title Defect Value for each Title Defect. Seller may elect,
at its sole cost and expense, but without obligation, to cure all or any portion
of such Title Defects. Buyer's failure to deliver to Seller such notice by May
18, 1999, shall be deemed a waiver by Buyer of all Title Defects that Seller
does not have notice of on such date.
8.3. Option to Terminate. If the aggregate of the Title Defect Values
attributable to all Title Defect Properties identified pursuant to the preceding
subsection shall exceed ten percent (10%) of the purchase price, either Buyer or
Seller may, at its sole option, terminate this Agreement without any further
obligation by giving written notice of termination. In the event of such
termination, Seller shall return the Performance Deposit to Buyer, without
interest, within ten (10) days of receipt of the notice of termination and
neither party shall have any further obligation or liability hereunder, subject
to Seller's right to cure as set out in 8.4 below.
8.4. Title Defect Adjustment. Seller shall have the opportunity to
cure, until thirty (30) days after Closing ("Cure Period"), any Title Defect. If
Seller fails or refuses to cure any Title Defect prior to the expiration of the
Cure Period, Buyer shall separately elect by notice to Seller to either (i)
retain the affected Title Defect Property and waive all of the Title Defects
applicable thereto (which waived Title Defects shall be deemed Permitted
Encumbrances), or (ii) receive from Seller an amount equal to the Title Defect
Value. If Buyer elects to receive the Title Defect Value, Buyer shall reconvey
to Seller that portion of the Assets, whether an undivided interest, separate
interest, or otherwise, that is materially and adversely affected by the Title
Defect, as to which Buyer received such adjustment; provided that Seller may,
without affecting Buyer's right to an adjustment, elect not to accept a
reconveyance of a Title Defect Property or portion thereof, relating to such
adjustment. Such reconveyance shall be free and clear of all liens and
encumbrances created by, through or under Buyer (other than liens or
encumbrances created by Buyer which would constitute Permitted Encumbrances had
they been created or suffered by Seller) with Seller receiving all revenues and
bearing all expense with respect thereto after the Effective Date and with
respect to any interests so reconveyed, they shall be deemed to be excluded from
the Assets and, except for the terms of this Section 8.4, from the terms and
conditions of this Agreement. In the event that any such property is reconveyed
to Seller and such property has been receiving revenue, without complaint, for a
period in excess of two years, then Buyer agrees (i) not to take any action to
interfere with such revenue stream, and (ii) to the extent that Buyer becomes
payor of such revenue, to pay Seller such revenue upon receipt of an indemnity
agreement satisfactory to Buyer.
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8.5 Title Defect Values for Developed Producing Properties, Proved
Developed Non-Producing Properties and Proved Undeveloped Properties In
determining the value of a Title Defect (the "Title Defect Value"), it is the
intent of the Parties to include, to the extent possible, only that portion of
the lands, leases and wells, whether an undivided interest, separate interest or
otherwise, materially and adversely affected by the defect. The Title Defect
Value shall be determined by the parties in good faith taking into account all
relevant factors, including, but not limited to, the following:
(a) the Allocated Value of the leases, lands and well affected by the
Title Defect;
(b) the potential or actual reduction in the warranted NRI of the Title
Defect Property, or the amount by which the cost sharing percentage for such
property is greater than the warranted WI;
(c) the productive or prospective status of the Title Defect Property
(i.e., proved developed producing, proved developed non-producing and/or proved
developed) and the present value of the future income expected to be produced
therefrom;
(d) if the Title Defect represents only a possibility of title failure,
the probability that such failure will occur;
(e) the legal effect of the Title Defect;
(f) if the Title Defect is a lien or encumbrance on the leases, lands
or wells, the cost of removing such lien or encumbrance.
8.6. Title Warranty.
SELLER SHALL CONVEY SELLER'S INTERESTS IN AND TO THE ASSETS TO BUYER
SUBJECT TO ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS, AND ENCUMBRANCES, AND
WITHOUT ANY WARRANTY OF TITLE, EXPRESS OR IMPLIED, AS PROVIDED IN THE FORM OF
ASSIGNMENT, BILL OF SALE AND CONVEYANCE ATTACHED AS EXHIBIT C HERETO. IMBALANCES
WITH RESPECT TO OIL OR NATURAL GAS ARE GOVERNED BY ARTICLE 17 HEREOF. THE
PARTIES AGREE THAT THE EXISTENCE OF ANY SUCH IMBALANCES SHALL NOT BE DEEMED A
TITLE DEFECT.
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ARTICLE 9. PREFERENTIAL PURCHASE RIGHTS AND CONSENTS
9.1 Actions and Consents.
(a) Seller and Buyer agree that each shall use all reasonable efforts
to take or cause to be taken all such action as may be necessary to consummate
and make effective the transaction provided in this Agreement and to assure that
It will not be under any material corporate, legal, or contractual restriction
that could prohibit or delay the timely consummation of such transaction.
(b) Although Seller makes no warranty or representation with respect to
the accuracy or completeness of Exhibit A, certain preferential purchase rights
or rights of approval or consent may exist with respect to the Assets under the
agreements and Leases shown on Exhibit A. To the best of Seller's knowledge,
Exhibit "E" lists all contracts containing Preferential Rights to Purchase and
Consents to Assign. Seller shall use reasonable efforts to notify all holders of
(i) preferential rights, (ii) rights of consent to the assignment, or (iii)
rights of approval to the assignment of the Assets, of its intention to exchange
the portion of the Assets affected thereby, and of such terms and conditions of
this Agreement to which the holders of such right are entitled. Seller shall
promptly notify Buyer if any preferential rights are exercised, any consents or
approvals denied, or if the requisite period has elapsed without said rights
having been exercised or consents or approvals having been received. If prior to
Closing, any such preferential rights are timely and properly exercised, or
Seller is unable to obtain a necessary consent or approval prior to Closing, the
interest or part thereof so affected shall be eliminated from the Assets and the
Purchase Price reduced by the portion of the Purchase Price allocated to such
interest or part thereof as provided in Exhibit B. Subject to Article 9.2 below.
If any additional third party preferential purchase rights are discovered after
Closing, or if a third party preferential rights holder alleges improper notice,
then Buyer agrees to cooperate with Seller in giving effect to any such valid
third party preferential purchase rights. In the event any such valid third
party preferential purchase rights are validly exercised after Closing, Buyers
sole remedy against Seller shall be return by Seller to Buyer of that portion of
the Purchase Price allocated under Exhibit B to the portion of the assets on
which such rights are exercised and lost by Buyer to such third party. The
Parties agree that any dispute that cannot be settled in good faith will be
settled in accordance with the Arbitration procedures as set out in Article 18.
hereof.
9.2. Option to Terminate. If the aggregate of any Preferential Purchase
Rights, Consents to Assign or Rights of Approval (hereinafter referred to as
Consents) attributable to all Consents identified pursuant to the preceding
subsection shall exceed ten percent (10%) of the purchase price, either Buyer or
Seller may, at its sole option, terminate this Agreement, without any further
obligation, by giving written notice of termination. In the event of such
termination, Seller shall return the Performance Deposit to Buyer, without
interest, within ten (10) days of receipt of the notice of termination and
neither party shall have any further obligation or liability
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hereunder. The Parties agree that any dispute that cannot be settled in good
faith will be settled in accordance with the Arbitration procedures as set out
in Article 18. hereof.
ARTICLE 10. COVENANTS OF SELLER
10.1 Covenants of Seller Pending Closing.
(a) From and after the date of execution of this Agreement and until
the Closing, and subject to Section 10.2 and the constraints of applicable
operating and other agreements, Seller shall operate, manage, and administer the
Assets in a good and workmanlike manner consistent with its past practices, and
shall carry on its business with respect to the Assets in substantially the same
manner as before execution of this Agreement. Seller shall use all reasonable
efforts to preserve in full force and effect all oil and gas leases, operating
agreements, easements, rights-of-way, permits, licenses, and agreements which
relate to the Assets in which Seller owns an interest, and shall perform all
obligations of Seller in or under all such agreements relating to the Assets;
provided, however, Buyer's sole remedy for Seller's breach of its obligations
under this Section 10.1(a) shall be limited to the amount of that portion of the
Purchase Price allocated in Exhibit B to that portion of the Assets affected by
such breach. Seller shall, except for emergency action taken in the face of
serious risk to life, property, the Assets or the environment (i) submit to
Buyer, for prior written approval, all requests for operating or capital
expenditures and all proposed contracts and agreements relating to the Assets
which involve individual commitments of more than Twenty-Five Thousand Dollars
($25,000.00); (ii) consult with, inform, and advise Buyer regarding all material
matters concerning the operation, management, and administration of the Assets;
(iii) obtain Buyer's written approval prior to voting under any operating, unit,
joint venture, partnership or similar agreement; and (4) not approve or elect to
go nonconsent as to any proposed well or plug and abandon or agree to plug and
abandon any well without Buyer's prior written approval. On any matter requiring
Buyer's approval under this Section 10. 1 (a) Buyer shall respond within five
(5) days to Seller's request for approval and failure of Buyer to respond to
Sellers request for approval within such time shall release Seller from the
obligation to obtain Buyer's approval before proceeding on such matter. However,
should there be an emergency on or involving any of the Assets, the time frame
for response from Buyer shall be twenty-four (24) hours.
(b) Seller shall promptly notify Buyer of any suit, lessor demand
action, or other proceeding before any court, arbitrator, or governmental agency
and any cause of action which relates to the Assets or which might result in
impairment or loss of Seller's interest in any portion of the Assets or which
might hinder or impede the operation of the Assets.
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10.2 Limitations on Seller's Covenants Pending Closing.
To the extent Seller is not the operator of any of the Assets, the
obligations of Seller in Section 10.1 concerning operations or activities which
normally or pursuant to existing contracts are carried out or performed by the
operator, shall be construed to require only that Seller use all reasonable
efforts (without being obligated to incur any expense or institute any cause of
action) to cause the operator of such Assets to take such actions or render such
performance within the constraints of the applicable operating agreements and
other applicable agreements.
ARTICLE 11. CLOSING CONDITIONS
11.1. Seller's Closing Conditions.
The obligations of Seller under this Agreement are subject, at the
option of Seller, to the satisfaction, at or prior to the Closing, of the
following conditions:
(a) all representations and warranties of Buyer contained in this
Agreement shall be true in all material respects at and as of the Closing as if
such representations and warranties were made at and as of the Closing, and
Buyer shall have performed and satisfied all agreements required by this
Agreement to be performed and satisfied by Buyer at or prior to the Closing;
(b) the execution, delivery, and performance of this Agreement and the
transactions contemplated thereby have been duly and validly authorized by all
necessary action, corporate, partnership or otherwise, on the part of Buyer,
(c) all necessary consents of and filings with any state or federal
governmental authority or agency relating to the consummation of the
transactions contemplated by this Agreement shall have been obtained,
accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing; and
(d) as of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Seller) shall be pending or threatened
before any court or governmental agency seeking to restrain Seller or prohibit
the Closing or seeking damages against Seller as a result of the consummation of
this Agreement.
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11.2. Buyer's Closing Conditions.
The obligations of Buyer under this Agreement are subject, at the
option of Buyer, to the satisfaction, at or prior to the Closing, of the
following conditions:
(a) all representations and warranties of Seller contained in this
Agreement shall be true in all material respects at and as of the Closing as if
such representations and warranties were made at and as of the Closing, and
Seller shall have performed and satisfied all agreements required by this
Agreement to be performed and satisfied by Seller at or prior to the Closing;
(b) the execution, delivery, and performance of this Agreement and the
transactions contemplated thereby have been duly and validly authorized by all
necessary action, corporate, partnership or otherwise, on the part of Seller;
(c) all necessary consents of and filings with any state or federal
governmental authority or agency relating to the consummation of the
transactions contemplated by this Agreement shall have been obtained,
accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing;
(d) as of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Buyer) shall be pending or threatened
before any court or governmental agency seeking to restrain Buyer or prohibit
the Closing or seeking damages against Buyer as a result of the consummation of
this Agreement.
ARTICLE 12. CLOSING
12.1. Closing.
The closing of this transaction (the "Closing") shall be held at the
offices of AmBrit Energy Corp., 8080 North Central, Suite 750, Dallas, Texas
75206, at 10:00 a.m. on June 1, 1999, or at such earlier date or place as the
Parties may agree in writing (herein called "Closing Date"). Time is of the
essence and the Closing Date shall not be extended unless by written agreement
of the Parties. On or before five (5) business days prior to Closing, Buyer and
Seller shall use their best efforts to provide each other copies of all closing
documents.
12.2 Seller's Closing Obligations.
At Closing, except to the extent comprising the Excluded Assets, Seller
shall deliver to Buyer the following:
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(a) the Assignment and Conveyance substantially in the form attached
hereto as Exhibit C and such other documents as may be reasonably necessary to
convey all of Seller's interest in the Assets to Buyer in accordance with the
provisions hereof;
(b) appropriate regulatory forms appointing Buyer Operator for those
Assets which Seller operates and for which Seller has received approvals under
the applicable joint operating agreements as provided for in Article 19.5
hereof.
(c) copies of all third-party waivers, consents, approvals, permits and
actions obtained;
(d) exclusive possession of the Assets; and
(e) Letters-in-lieu of transfer orders in form acceptable to Seller and
Buyer.
12.3. Buyer's Closing Obligations.
At Closing, Buyer shall deliver to Seller by wire transfer in
immediately available funds to an Account designated by Seller, the Purchase
Price (less the Performance Deposit) as adjusted by Section 3.4;
12.4 Joint Closing Obligations.
Both Parties at Closing shall execute a Settlement Statement, as set
out in Article 3.4, evidencing the amount actually wire transferred and all
adjustments to the Purchase Price taken into account at Closing. All events of
Closing shall each be deemed to have occurred simultaneously with the other,
regardless of when actually occurring, and each shall be a condition precedent
to the other.
ARTICLE 13. LIMITATIONS ON WARRANTIES AND REMEDIES
THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY
REPRESENTATION OR WARRANTY WITH RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF
THE RESERVES, IF ANY, OF OIL, GAS OR OTHER HYDROCARBONS IN OR UNDER THE LEASES,
OR THE ENVIRONMENTAL CONDITION OF THE ASSETS. THE ITEMS OF PERSONAL PROPERTY,
EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED AS PART OF THE
ASSETS ARE SOLD HEREUNDER, AS IS, WHERE IS, AND WITH ALL FAULTS AND NO
WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY,
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FITNESS FOR A PARTICULAR PURPOSE OR CONDITION, ARE GIVEN BY OR ON BEHALF OF
SELLER. IT IS UNDERSTOOD AND AGREED THAT PRIOR TO CLOSING BUYER SHALL HAVE
INSPECTED THE ASSETS FOR ALL PURPOSES AND HAS SATISFIED ITSELF AS TO THEIR
PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND THAT
BUYER ACCEPTS SAME IN ITS 'AS IS, WHERE IS AND WITH ALL FAULTS', CONDITION. THE
WARRANTIES OF SELLER CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, AND BUYER HEREBY WAIVES ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONDITION, OR
CONFORMITY TO SAMPLES.
ARTICLE 14. CASUALTY LOSS AND CONDEMNATION
14.1. If, after the Effective Date and prior to the Closing, all or any
portion of the Assets is destroyed by fire or other casualty or if any portion
of the Assets shall be taken by condemnation or under the right of eminent
domain (all of which are herein called "Casualty Loss" and limited to property
damage or taking only), Buyer and Seller must agree prior to Closing either (i)
to delete that portion of the Assets which is subject to the Casualty Loss from
the Assets, and the Purchase Price shall be reduced by the value allocated to
the deleted interest as set out in Exhibit B or (ii) for Buyer to proceed with
the purchase of such Assets, notwithstanding any such destruction or taking
(without reduction of the Purchase Price) in which case Seller shall pay, at the
Closing, to Buyer all sums paid to Seller by third parties by reason of the
destruction or taking of such Assets and shall assign, transfer and set over
unto Buyer all of the right, title and interest of Seller in and to any claims,
causes of action, unpaid proceeds or other payments from third parties arising
out of such destruction or taking; provided, however, if the value of that
portion of the Assets affected by the casualty Loss, not to exceed that
allocated in Exhibit B, exceeds ten percent (10%) of the Purchase Price, Buyer
and Seller shall each have the right to terminate this Agreement upon written
notification to the other, the transaction shall not close and thereafter
neither Buyer nor Seller shall have any liability or further obligations to the
other hereunder and the Performance Deposit will be returned to Buyer subject to
14.2 below. Prior to Closing, Seller shall not voluntarily compromise, settle or
adjust any amounts payable by reason of any Casualty Loss without first
obtaining the written consent of Buyer. The Parties agree that any dispute that
cannot be settled in good faith will be settled in accordance with the
Arbitration procedures as set out in Article 18. hereof.
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14.2. Option to Terminate. If the aggregate of the Casualty Loss
attributable pursuant to the preceding subsection shall exceed ten percent (10%)
of the purchase price, either Buyer or Seller may, at its sole option, terminate
this Agreement without any further obligation by giving written notice of
termination. In the event of such termination, Seller shall return the
Performance Deposit to Buyer, without interest, within ten (10) days of receipt
of the notice of termination and neither party shall have any further obligation
or liability hereunder, subject to Seller's right to cure as set out in 14.3
below.
14.3. Casualty Loss Adjustment. Seller shall have the opportunity to
cure, until thirty (30) days after Closing ("Cure Period"), any Casualty Loss.
If Seller fails or refuses to cure any Casualty Loss prior to the expiration of
the Cure Period, Buyer shall elect by notice to Seller to either (i) retain the
affected Casualty Loss Property and waive all of the Casualty Loss adjustments
applicable thereto or (ii) terminate this Agreement in accordance with Article
8.3 above.
ARTICLE 15. DEFAULT AND REMEDIES
15.1. Seller's Remedies.
Upon failure of Buyer to comply herewith by the Closing Date, as it may
be extended in accordance herewith, Seller, at its sole option, may (i) enforce
specific performance, or (ii) retain the Performance Deposit as a liquidated
damage and not as a penalty, and terminate this Agreement, as Seller's sole and
exclusive remedies for such default, all other remedies (except as expressly
retained in Section 15.3) being expressly waived by Seller.
15.2. Buyer's Remedies.
Upon failure of Seller to comply herewith by the Closing Date, as it may
be extended in accordance herewith, Buyer may terminate this Agreement and
request return of the Performance Deposit, as Buyer's sole and exclusive remedy
for such default, all other remedies (except as expressly retained in Section
15.3) being expressly waived by Buyer.
15.3. Other Remedies.
Notwithstanding the foregoing, termination of this Agreement shall not
prejudice or impair Buyer's obligations under Section 6.3 (and the
confidentiality agreements referenced therein) and 6.4. and such other portions
of this Agreement as are necessary to the enforcement and construction of
Section 6.3 and 6.4. The prevailing party in any legal proceeding brought under
or to enforce this Agreement shall be additionally entitled to recover court
costs and reasonable attorneys' fees from the non-prevailing party.
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15.4. Effect of Termination.
In the event of termination of this Agreement under this Article 15,
the transaction shall not close and neither Buyer nor Seller shall have any
further obligations, remedies, liabilities, rights or duties to the other
hereunder, except as expressly provided herein.
ARTICLE 16. ASSUMPTION AND INDEMNITY
16.1. Assumed Obligations; Pre-Closing Liabilities.
Buyer shall assume all risk and loss with respect to any change in the
condition of the assets from the Effective Time until Closing for production of
Hydrocarbons through normal depletion (including the watering-out or sand
infiltration of any well) and the depreciation of personal property through
ordinary wear and tear. Upon and after Closing Buyer shall own the Assets,
together with all the rights, duties, obligations, and liabilities accruing
after Closing, including the Assumed Obligations and Buyer's indemnity
obligations hereunder. Buyer agrees to assume and pay, perform, fulfill and
discharge all Assumed Obligations.
16.2. Plugging, Replugging, Abandonment, Removal, Disposal, and
Restoration.
On and after the Effective Date, Buyer shall assume all of Seller's
plugging, replugging, abandonment, removal, disposal and restoration obligations
associated with the Assets, including, but not limited to (i) all necessary and
proper plugging, replugging, abandonment, removal and disposal of the wells,
structures, and equipment located on or comprising a part of the Assets, (ii)
the necessary and proper capping and burying all associated flow lines, (iii)
the proper abandonment and restoration of all oil and gas leasehold, fee, and
other property comprising a part of the Assets, both, surface and subsurface, as
may be required by applicable laws, regulations, or contract, and (iv) any
necessary disposal of naturally occurring radioactive material (NORM). Buyer
shall be responsible for the plugging and abandonment of any wells drilled and
the removal of any structures placed on the Assets subsequent to Closing. All
plugging, replugging, abandonment, removal, disposal, and restoration operations
shall be in compliance with applicable laws and regulations and be performed in
a good and workmanlike manner.
16.3. Buyer's Indemnity
(a) Except as provided for in Section 16.4, Buyer agrees to indemnify,
defend and hold Seller harmless from and against any and all claims, demands,
losses, damages, punitive damages, costs, expenses, causes of action or
judgments of any kind or character with respect to all liabilities and
obligations or alleged or
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threatened liabilities and obligations caused, after the Effective Date, by or
related to damage to property, environmental damage or pollution, including
liability based on strict liability or condition of the Assets, attributable to
or arising, after the effective date, out of (i) the Environmental Obligations
or Liabilities and Buyers plugging, replugging, abandonment, removal, disposal
and restoration obligations described in Section 16.2, (ii) Buyers acts or
omissions, and (iii) the ownership or operation of the Assets by Buyer or Seller
at any time, including, without limitation, any interest, penalty, reasonable
attorneys' fees and other costs and expenses incurred in connection therewith or
the defense thereof, WHETHER OR NOT CAUSED IN WHOLE OR IN PART BY (AND
INCLUDING) ANY SOLE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF SELLER, OR
THE CONDITION OF THE ASSETS. However, notwithstanding anything to the contrary
contained herein, in the event any of the provisions of this Article 16.3.
conflict with the provisions of Article 7. of this Purchase and Sale Agreement,
the provisions of Article 7. shall prevail.
(b) Buyer further agrees to indemnify, defend and hold Seller harmless
from and against any and all claims for personal injury, illness, disease and
wrongful death which arise or are asserted after the Effective Date and which
are attributable to the ownership and operation of the Assets by Buyer,
including, without limitation, any interest, penalty, reasonable attorneys' fees
and other costs and expenses incurred in connection therewith or the defense
thereof. However, Seller will keep the Assets insured until the Closing Date.
Buyer agrees that it will reimburse Seller for such insurance costs, applicable
to the Assets, plus any deductible, from the Effective Date until the Closing
Date.
16.4. Seller's Indemnity.
Seller agrees to indemnify, defend and hold Buyer harmless from and
against any and all claims for improper payment of royalties or other revenues,
personal injury, illness, disease, and/or wrongful death which arise or are
asserted prior to the Effective Date or are asserted after the Effective Date
and are solely attributable to the ownership and operation of the Assets by
Seller prior to the Effective Date, including, without limitation, any interest,
penalty, reasonable attorneys' fees and other costs and expenses in connection
therewith or in the defense thereof.
16.5. Proceeds of Production.
Seller shall be responsible for any and all liabilities, claims, causes
of action, damages, and punitive damages arising out of the accounting or
payment of proceeds of production to royalty owners and working interest owners
in the Leases and/or units comprising a part of the Assets, insofar as such
liabilities, claims, causes of action, and damages relate to or arise out of
actions of Seller or events prior to the Effective Time and shall defend,
indemnify, and hold Buyer harmless from and against all such claims. Buyer shall
be responsible for all of said types of claims
25
<PAGE>
insofar as they relate to periods of time from and after the Effective Time and
shall defend, indemnify, and hold Seller harmless therefrom.
16.6. Broker or Finder's Fee.
Each party hereby agrees to indemnify and hold the other harmless from
and against any claim for a brokerage or finder's fee or commission in
connection with this Agreement or the transactions contemplated by this
Agreement to the extent such claim arises from or is attributable to the actions
of such indemnifying party, including, without limitation, any and all losses,
damages, punitive damages, attorneys' fees, costs and expenses of any kind or
character arising out of or incurred in connection with any such claim or
defending against the same.
16.7. NORM.
BUYER ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS PRODUCING
FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL (NORM). SOME OR
ALL OF THE EQUIPMENT, MATERIAL, APPURTENANCES, IMPROVEMENTS, AND FIXTURES
SUBJECT TO THIS AGREEMENT MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A
HEALTH HAZARD MAY EXIST IN CONNECTION WITH THIS EQUIPMENT. THEREFORE, BUYER MAY
NEED TO FOLLOW SAFETY PROCEDURES WHEN HANDLING THIS EQUIPMENT. Buyer agrees to
indemnify, defend and hold Seller harmless from and against any and all claims,
demands, losses, damages, punitive damages, costs, expenses, causes of action or
judgments of any kind or character with respect to all liabilities and
obligations, or alleged or threatened liabilities and obligations, including
claims for personal injury, illness, disease, wrongful death, damage to
property, environmental pollution or contamination, cleanup expenses, and
liability based on strict liability or condition of the Assets, attributable to
or arising out of the existence of NORM on the equipment, material,
appurtenances, improvements, and fixtures subject to this Agreement, including,
without limitation, any interest, penalty, reasonable attorneys, fees and other
costs and expenses incurred in connection therewith or the defense thereof,
WHETHER OR NOT CAUSED BY (AND INCLUDING) ANY SOLE OR CONCURRENT NEGLIGENCE OR
STRICT LIABILITY OF SELLER, OR THE CONDITION OF THE ASSETS. The indemnity
provided for in this Section 16.7 shall not be interpreted to cover or apply to
claims for personal injury, illness, disease or wrongful death which arise or
are asserted prior to the Effective Date or are asserted after the Effective
Date and are solely attributable to the ownership and operation of the Assets by
Seller prior to the Effective Date.
26
<PAGE>
16.8. Miscellaneous.
The indemnities of Seller herein shall not cover or include any amounts
for which Buyer may legally recoup from other third party owners without
judicial process, or that for which Buyer is reimbursed by any third party.
There shall be no upward or downward adjustment to the Purchase Price as a
result of any matter for which Buyer or Seller is indemnified under this
Agreement. The indemnities in this Agreement shall not relieve Buyer or Seller
from any obligations to third parties. The indemnities of Seller and Buyer
herein shall not relieve the indemnified party from, or extend to cover, any
obligations of the indemnified party under the terms of any operating agreement
or other cost-sharing arrangement which is applicable to any claim. With respect
to any claim for which an indemnifying party may be required to provide partial
or full indemnity, or for which a party may be obligated to defend in warranty,
such party shall have the right, but not the obligation, to participate fully in
the defense of any such claim. Reasonable attorneys' fees, court costs,
interest, penalties, and other expenses incurred in connection with the defense
of such claims shall be included in Seller's and Buyer's indemnities herein. All
indemnities of Buyer and Seller herein shall extend to and cover the parent,
subsidiary and affiliated companies and the officers, directors, employees,
partners, and agents of the indemnified party and its parent, subsidiary and
affiliated companies.
ARTICLE 17. GAS IMBALANCES
Seller represents that, except as shown on Exhibit D, Seller is not
obligated by virtue of (i) any prepayment arrangement, (ii) a "take-or-pay" or
similar provision, (iii) a production payment, (iv) "gas balancing agreements",
or (v) any other arrangement to deliver hydrocarbons produced from the Assets at
some future time without then or thereafter receiving full payment therefor. If,
prior to Closing, such a payment obligation is disclosed or discovered, Seller
and Buyer shall meet and in good faith negotiate an appropriate purchase price
adjustment. At Closing Buyer agrees to assume any asset or liability and
obligation for gas production imbalances (whether over or under) attributable to
the interest acquired hereunder as of the Effective Date. In assuming this
liability at Closing, Buyer shall not be obligated to make any additional
payment over the Purchase Price to Seller and Seller shall not be obligated to
refund any of said price to reimburse Buyer for any over-balances existing at
the time of sale. Buyer and Seller agree that the economic effect of the
imbalances set forth on Exhibit D are included in the Purchase Price set forth
in Section 3.1.
ARTICLE 18. ARBITRATION
If a dispute arises out of or relates to this Agreement and if the
dispute cannot be settled through good faith negotiation, Buyer and Seller
hereby agree that such matter and/or dispute be arbitrated as set forth below:
27
<PAGE>
(a) The Parties shall jointly select a mutually acceptable person as
the sole arbitrator under this Agreement. If the Parties are unable to agree
upon the designation of a person as arbitrator, then either Seller or Buyer, or
all of such Parties, may in writing request the Judge of the United States
District Court of Dallas County, Texas, to appoint a qualified arbitrator;
(b) Any arbitration hearing shall be held at a mutually agreeable
location in Dallas, Texas, acceptable to the arbitrator;
(c) the arbitrator shall settle disputes regarding existence and value
of any Title Defect under Article 8. Title Defects, Termination and Adjustments,
any dispute in connection with the Final Accounting under Article 3.4.(f) hereof
or any other dispute in connection with this Purchase and Sale Agreement , in
accordance with the Texas General Arbitration Act and the Rules of the American
Arbitration Association, to the extent such rules do not conflict with the terms
of such act and the terms hereof. The decision of the arbitrator shall be
binding upon the parties, and may be enforced in any court of competent
jurisdiction. Seller and Buyer, respectively, shall bear their own legal fees
and other costs incurred in presenting their respective cases. The charges and
expenses of the arbitrator shall be shared equally by Seller and Buyer;
(d) the arbitration shall commence within ten (10) days after the
arbitrator is selected as set forth in Article 18.(a) above. In fulfilling his
duties hereunder, the arbitrator shall be bound by the terms of this Agreement.
In fulfilling any of his arbitration duties, the arbitrator may consider such
other matters as in the opinion of the arbitrator are necessary or helpful to
make a proper evaluation. Additionally, the arbitrator may consult with and
engage disinterested third parties, including, without limitation, petroleum
engineers, accountants, attorneys and consultants, to advise the arbitrator;
(e) if any arbitrator selected hereunder (whether selected by Seller
and Buyer or the Judge) should die, resign or be unable to perform his duties
hereunder, the parties or Judge selecting such arbitrator shall select a
replacement arbitrator. The aforesaid procedure shall be followed from time to
time as necessary.
ARTICLE 19. MISCELLANEOUS
19.1. Public Announcements.
The parties hereto agree that prior to Closing, prior to making any
public announcement or statement with respect to the transaction contemplated by
this Agreement, the party desiring to make such public announcement or statement
shall consult with the other party hereto and exercise its best efforts to (i)
agree upon the
28
<PAGE>
text of a joint public announcement or statement to be made by both of such
parties; or (ii) obtain written approval of the other party hereto to the text
of a public announcement or statement to be made solely by Seller or Buyer, as
the case may be. Nothing contained in this paragraph shall be construed to
require either party to obtain approval of the other party hereto to disclose
information with respect to the transaction contemplated by this Agreement to
any state or federal governmental authority or agency to the extent (i) required
by applicable law or by any applicable rules, regulations or orders of any
governmental authority or agency having jurisdiction; or (ii) necessary to
comply with disclosure requirements of the London Stock Exchange or other
recognized exchange or over the counter, and applicable securities laws.
19.2. Filing and Recording of Assignments, etc.
Buyer shall be solely responsible for all filings and recording of
assignments and other documents related to the Assets and for all fees connected
therewith, and upon request Buyer shall advise Seller of the pertinent recording
data. Seller shall not be responsible for any loss to Buyer because of Buyer's
failure to file or record documents correctly or promptly. Buyer shall promptly
file all appropriate forms, declarations or bonds with federal and state
agencies relative to its assumption of operations and Seller shall cooperate
with Buyer in connection with such filings.
19.3. Further Assurances and Records.
(a) After the Closing each of the parties will execute, acknowledge and
deliver to the other such further instruments, and take such other action, as
may be reasonably requested in order to more effectively assure to said party
all of the respective properties, rights, titles, interests, estates, and
privileges intended to be assigned, delivered or inuring to the benefit of such
party in consummation of the transactions contemplated hereby.
(b) Buyer agrees to maintain the files and records of Seller that are
acquired pursuant to this Agreement for seven (7) years after Closing. Buyer
shall provide Seller and its representatives reasonable access to and the right
to copy such files and records for the purposes of (i) preparing and delivering
any accounting provided for under this Agreement and adjusting, prorating and
settling the charges and credits provided for in this Agreement; (ii) complying
with any law, rule or regulation affecting Seller's interest in the Assets prior
to the Closing Date; (iii) preparing any audit of the books and records of any
third party relating to Seller's interest in the Assets prior to the Closing
Date, or responding to any audit prepared by such third parties; (iv) preparing
tax returns; (v) responding to or disputing any tax audit; or (vi) asserting,
defending or otherwise dealing with any claim or dispute under this Agreement.
29
<PAGE>
(c) Buyer agrees that within thirty (30) days after Closing or within
thirty (30) days after operations are actually transferred, whichever is later,
it will remove or cause to be removed the names and marks used by Seller and all
variations and derivatives thereof and logos relating thereto from the Assets
and will not thereafter make any use whatsoever of such names, marks and logos.
(d) To the extent not obtained or satisfied as of Closing, Seller
agrees to continue to use all reasonable efforts, but without any obligation to
incur any cost or expense in connection therewith, and to cooperate with Buyer's
efforts to obtain for Buyer (i) access to files, records and data relating to
the Assets in the possession of third parties; and (ii) access to wells
constituting a part of the Assets operated by third parties for purposes of
inspecting same.
(e) Buyer shall comply with all current and subsequently amended
applicable laws, ordinances, rules, and regulations applicable to the Assets and
shall promptly obtain and maintain all permits required by governmental
authorities in connection with the Assets.
19.4. Notices.
Except as otherwise expressly provided herein, all communications
required or permitted under this Agreement shall be in writing and any
communication or delivery hereunder shall be deemed to have been duly given and
received when actually delivered to the address of the parties to be notified as
set forth below and addressed as follows:
If to Seller, as follows:
AmBrit Energy Corp.
8080 North Central, Suite 750
Dallas, Texas 75206
Attention: Jim Buron
Phone: (214) 891-8870
Fax: (214) 891-8852
If to Buyer:
Castle Energy Company
Suite 250, One Radnor Corporate Center
Radnor, PA 19087
Attention: Rick Staedtler
Phone: 610-995-9400
Fax: 610-995-0409
30
<PAGE>
Provided, however, that any notice required or permitted under this Agreement
will be effective if given verbally within the time provided, so long as such
verbal notice is followed by written notice thereof in the manner provided
herein within twenty-four (24) hours following the end of such time period. Any
party may, by written notice so delivered to the other, change the address to
which delivery shall thereafter be made.
19.5 No Guarantee of Operations.
Buyer understands that operation of all or part of the Assets may be
subject to operating agreements or other contracts governing the election or
appointment of an Operator. Seller does not warrant or represent that Buyer will
become Operator of any of the Assets. However, upon Buyer's execution of this
Purchase and Sale Agreement and payment of the Performance Deposit provided for
herein, Seller agrees that it will begin the process of attempting to obtain
approvals for Buyer to take over as operator at Closing of the Assets that
Operator currently operates.
19.6. Incidental Expenses.
Buyer shall bear and pay (i) all state or local government sales,
transfer, gross proceeds, or similar taxes incident to or caused by the transfer
of the Assets to Buyer, (ii) all documentary, transfer and other state and local
government taxes incident to the transfer of the Assets to Buyer; and (iii) all
filing, recording or registration fees for any assignment or conveyance
delivered hereunder. Each party shall bear its own respective expenses incurred
in connection with the negotiation and Closing of this transaction, including it
own consultants' fees, attorneys' fees, accountants' fees, and other similar
costs and expenses.
19.7. Antitrust Laws.
If the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") is applicable to this transaction, then each party shall have the
responsibility for filing with the Federal Trade Commission and the Department
of Justice their respective notifications and reports and any supplemental
information which may be reasonably requested in connection with the HSR Act,
which reports and notifications and supplemental information will comply in all
material respects with the requirements of the HSR Act.
19.8. Waiver.
Any of the terms, provisions, covenants, representations, warranties or
conditions hereof may be waived only by a written instrument executed by the
party waiving compliance. Except as otherwise expressly provided in this
Agreement, the failure of any party at any time or times to require performance
of any provision hereof shall in no manner affect such party's right to enforce
the same. No waiver by any party of any condition, or of the breach of any term,
provision, covenant,
31
<PAGE>
representation or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition or of the breach of any other term, provision, covenant,
representation or warranty.
19.9. Binding Effect; Assignment.
All the terms, provisions, covenants, obligations, indemnities,
representations, warranties and conditions of this Agreement shall be
enforceable by the parties hereto and their respective successors and assigns.
The rights of each party under this Agreement are personal to that party and may
not be assigned or transferred to any other party, firm, corporation or other
entity, without the prior, express and written consent of the other party, and
such consent may be withheld for any reason, including convenience. Any attempt
to assign this Agreement over the objection or without the express written
consent of the other party shall be absolutely void. Seller may condition its
consent to assign this Agreement on Buyer providing Seller with an appropriate
guarantee of its assignee's performance. In the event Buyer sells or assigns all
or a portion of the Assets, this Agreement shall remain in effect between Buyer
and Seller as to all the Assets regardless of such assignment.
19.10. Taxes.
(a) Seller and Buyer agree that this transaction is not subject to the
reporting requirement of Section 1060 of the Internal Revenue Code of 1986, as
amended, and that, therefore, IRS Form 8594, Asset Acquisition Statement, is not
required to be and will not be filed for this transaction. In the event the
parties mutually agree that a filing of Form 8594 is required, the parties will
confer and cooperate in the preparation and filing of their respective forms to
reflect a consistent reporting of the agreed upon allocation.
(b) Seller shall be responsible for and shall pay all taxes
attributable to or arising from the ownership or operation of the Assets prior
to the Effective Time. Buyer shall be responsible for and shall pay all taxes
attributable to or arising from the ownership or operation of the Assets after
the Effective Time. Any party which pays such taxes for the other party shall be
entitled to prompt reimbursement upon evidence of such payment. Each party shall
be responsible for its own federal income taxes, if any, as may result from this
transaction.
32
<PAGE>
(c) If this transaction is determined to result in state sales or
transfer taxes, Buyer shall be solely responsible for any and all such taxes due
on the Assets acquired by Buyer by virtue of this transaction. If Buyer is
assessed such taxes, Buyer shall promptly remit same to the taxing authority. If
Seller is assessed such taxes, Buyer shall reimburse Seller for any such taxes
paid by Seller to the taxing authority.
19.11. Confidentiality of Agreement.
This Agreement and the terms and provisions thereof, including the
Purchase Price, shall be maintained confidential by Buyer and Seller until
Closing; provided, however, that this Agreement and the terms and provisions
thereof may be disclosed to Buyer's lenders, if any, and their consultants, who
shall be required to keep such information confidential except as provided for
in Article 18.1.
19.12. Audits
It is expressly understood and agreed that Seller retains its right to
receive its proportionate share of the proceeds from any audits relating to
activities prior to the Effective Time.
19.13 Like-Kind Exchanges.
Each party consents to the other party's assignment of its rights and
obligations under this Agreement to its Qualified Intermediary (as that term is
defined in Section 1.1031(k)-I(g)(4)(v) of the Treasury Regulations) in
connection with effectuation of a like-kind exchange. However, Seller and Buyer
acknowledge and agree that any assignment of this Agreement to a Qualified
Intermediary does not release either party from any of their respective
liabilities and obligations to each other under this Agreement. Each party
agrees to cooperate with the other to attempt to structure the transaction as a
like-kind exchange.
19.14. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAWS OTHERWISE APPLICABLE TO SUCH DETERMINATIONS. THE PARTIES WAIVE THE
PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES ACT, OTHER THAN SECTION 17.555
THEREOF WHICH IS NOT WAIVED. IN ORDER TO EVIDENCE ITS ABILITY TO GRANT SUCH
WAIVER, BUYER HEREBY REPRESENTS AND WARRANTS TO SELLER THAT BUYER (i) IS IN THE
BUSINESS OF SEEKING OR ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR
COMMERCIAL OR BUSINESS USE, (ii) HAS KNOWLEDGE
33
<PAGE>
AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE
MERITS AND RISKS OF THE TRANSACTION CONTEMPLATED HEREBY, AND (iii) IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION.
19.15. Entire Agreement.
This Agreement embodies the entire agreement between the Parties and
replaces and supersedes all prior agreements, arrangements and understandings
related to the subject matter hereof, whether written or oral. No other
agreement, statement, or promise made by any party, or to any employee, officer
or agent of any party, which is not contained in this Agreement shall be binding
or valid. This Agreement may be supplemented, altered, amended, modified or
revoked by writing only, signed by the Parties hereto. The headings herein are
for convenience only and shall have no significance in the interpretation
hereof. The Parties stipulate and agree that this Agreement shall be deemed and
considered for all purposes, as prepared through the joint efforts of the
Parties, and shall not be construed against one party or the other as a result
of the preparation, submittal or other event of negotiation, drafting or
execution thereof. It is understood and agreed that there shall be no
third-party beneficiary of this Agreement, and that the provisions hereof do not
impart enforceable rights in anyone who is not a party or a successor or
assignee of a party hereto.
19.16. Exhibits.
All Exhibits and Schedules attached to this Agreement, and the terms of
those Exhibits and Schedules which are referred to in this Agreement, are made a
part hereof and incorporated herein by reference.
19.17. Delivery of Files After Closing
All files, documents, records, etc. relating to the Assets shall be
provided by Seller to Buyer as soon as reasonably possible after the Closing
Date at a location to be specified by Seller. Any transportation, postage, or
delivery costs from Seller's offices shall be at Buyer's sole cost, risk and
expense.
19.18. Buyer's Covenants in Connection with the AmBrit/United Lawsuit
Buyer, by its execution hereof, covenants and agrees that it will not
compromise Seller's rights with regard to the revenues deposited into the
registry of the court, as set out in Article 1.8.(a). hereof through compromise
or settlement of the AmBrit/United Lawsuit. Should Buyer agree to a settlement
of said lawsuit which would cause Seller to lose all or any portion of said
revenues, either prior to or after
34
<PAGE>
Closing, Buyer agrees that it will make Seller whole by paying Seller a sum of
money equal to that deposited in the registry of the Court as set out above.
19.19. Survival.
All of the representations, warranties, covenants and agreements of or
by the Seller shall survive for a period of one (1) year after Closing and the
execution and delivery of the Assignment and Conveyance and shall thereafter
terminate and be of no force or effect. All of the representations, warranties,
covenants and agreements of or by Buyer shall survive Closing and the execution
and delivery of the Assignment and Conveyance.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
SELLER:
AMBRIT ENERGY CORP.
By:/s/Jim Buron
-----------------------
Jim Buron, President
BUYER:
CASTLE EXPLORATION COMPANY, INC.
By: /s/Richard E. Staedtler
------------------------
Richard E. Staedtler
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1999
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> MAR-31-1999
<PERIOD-END> DEC-30-1998
<CASH> 43,845
<SECURITIES> 575
<RECEIVABLES> 7,964
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,278
<PP&E> 12,883
<DEPRECIATION> 7,791
<TOTAL-ASSETS> 64,344
<CURRENT-LIABILITIES> 13,177
<BONDS> 0
0
0
<COMMON> 3402
<OTHER-SE> 47,764
<TOTAL-LIABILITY-AND-EQUITY> 64,344
<SALES> 22,365
<TOTAL-REVENUES> 22,365
<CGS> 13,318
<TOTAL-COSTS> 17,540
<OTHER-EXPENSES> 1,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,336
<INCOME-TAX> 1,398
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $3,938
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.37
</TABLE>
