<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
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Commission file number: 0-10990
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CASTLE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Radnor Corporate Center, Suite 250, 100 Matsonford Road,
Radnor, Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 995-9400
---------------------------
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 7,012,887 shares of
Common Stock, $.50 par value outstanding as of February 11, 2000.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
Page #
------
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - December 31, 1999
(Unaudited) and September 30, 1999................... 1
Consolidated Statements of Operations - Three Months
Ended December 31, 1999 and 1998 (Unaudited)......... 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended December 31, 1999 and 1998 (Unaudited).. 3
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1999 and Three Months Ended
December 31, 1999 (Unaudited)........................ 4
Notes to the Consolidated Financial Statements
(Unaudited) .......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11
Item 3. Qualitative and Quantitative Disclosures About
Market Risk ........................................ 19
Part II. Other Information
Item 1. Legal Proceedings................................... 20
Item 6. Exhibits and Reports on Form 8-K.................... 20
Signature .................................................................21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................... $ 12,389 $ 22,252
Restricted cash............................................................. 1,669 770
Accounts receivable......................................................... 4,975 5,172
Marketable securities....................................................... 6,406 4,194
Prepaid expenses and other current assets................................... 405 594
Estimated realizable value of discontinued net refining assets.............. 800 800
---------- ----------
Total current assets...................................................... 26,644 33,782
Property, plant and equipment, net:
Natural gas transmission.................................................... 58 60
Furniture, fixtures and equipment........................................... 244 298
Oil and gas properties, net (full cost method)..............................
Proved properties......................................................... 28,577 24,765
Unproved properties not being amortized................................... 2,951 1,862
Other assets.................................................................... 29 29
---------- ----------
Total assets.............................................................. $ 58,503 $60,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable............................................................ $ 350 $ 368
Accounts payable............................................................ 2,574 2,918
Accrued expenses............................................................ 340 802
Net refining liabilities retained........................................... 3,204 3,205
---------- ----------
Total current liabilities................................................. 6,468 7,293
---------- ----------
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;
11,503,904 issued at December 31, 1999 and September 30, 1999 ............ 5,752 5,752
Additional paid-in capital.................................................. 67,365 67,365
Accumulated other comprehensive income - unrealized gains on
marketable securities, net of taxes....................................... 4,563 2,396
Retained earnings........................................................... 38,632 38,716
---------- ----------
116,312 114,229
Treasury stock at cost - 4,491,017 shares at December 31, 1999 and
4,282,217 shares at September 30, 1999.................................. (64,277) (60,726)
---------- ----------
Total stockholders' equity................................................ 52,035 53,503
---------- ----------
Total liabilities and stockholders' equity................................ $ 58,503 $ 60,796
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
---- ----
Revenues:
<S> <C> <C>
Natural gas marketing and transmission:
Gas sales.......................................................... $ 20,455
----------
20,455
----------
Exploration and production:
Oil and gas sales.................................................. $ 4,085 391
Well operations.................................................... 174 90
---------- ----------
4,259 481
---------- ----------
4,259 20,936
---------- ----------
Expenses:
Natural gas marketing and transmission:
Gas purchases...................................................... 12,946
Transportation..................................................... 459
General and administrative......................................... 89
Amortization....................................................... 2,366
----------
15,860
----------
Exploration and production:
Oil and gas production............................................. 1,549 194
General and administrative......................................... 498 247
Depreciation, depletion and amortization........................... 1,272 67
---------- ----------
3,319 508
---------- ----------
Corporate general and administrative expenses........................ 908 1,113
---------- ----------
4,227 17,481
---------- ----------
Operating income......................................................... 32 3,455
---------- ----------
Other income:
Interest income...................................................... 199 467
Other income......................................................... 33 1
---------- ----------
232 468
---------- ----------
Net income before provision for income taxes............................. 264 3,923
---------- ----------
Provision for income taxes:
State............................................................ 39
Federal.......................................................... 5 1,373
---------- ----------
5 1,412
---------- ----------
Net income............................................................... $ 259 $ 2,511
========== ==========
Net income per share:
Basic................................................................ $ .04 $ .28
========== ==========
Diluted.............................................................. $ .04 $ .28
========== ==========
Weighted average number of common and common equivalent shares outstanding:
Basic............................................................. 7,127,739 8,822,187
========== ==========
Diluted........................................................... 7,247,832 9,003,726
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash flow provided by operating activities.......................... $ 173 $ 4,505
---------- ----------
Cash flows from investing activities:
Investment in oil and gas properties................................. (6,095) (186)
Investment in furniture, fixtures and equipment...................... (22) (29)
---------- ----------
Net cash (used in) investing activities......................... (6,117) (215)
---------- ----------
Cash flows from financing activities:
Dividends paid to stockholders........................................ (368) (443)
Acquisition of treasury stock......................................... (3,551)
----------
Net cash (used in) financing activities......................... (3,919) (443)
---------- ----------
Net increase (decrease) in cash and cash equivalents..................... (9,863) 3,847
Cash and cash equivalents - beginning of period.......................... 22,252 36,600
---------- ----------
Cash and cash equivalents - end of period................................ $ 12,389 $ 40,447
========== ==========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest........................................................
Income taxes.................................................... $ 25
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(Dollars in Thousands Except Share Amounts)
<TABLE>
<CAPTION>
Years Ended September 30, 1999 And Three Months Ended December 31, 1999
------------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Additional Compre- Compre- Treasury Stock
-------------------- Paid-In hensive hensive Retained --------------
Shares Amount Capital Income Income Earnings Shares Amount Total
------ ------ ------- ------- ------ -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1998...... 6,803,646 $3,402 $67,122 $34,836 3,862,917 ($53,807) $51,553
Stock acquired................. 419,300 (6,919) (6,919)
Options exercised.............. 25,000 12 243 255
Dividends declared ($.25 per share) (2,048) (2,048)
Stock split retroactively
applied ..................... 4,675,258 2,338 (2,338)
Comprehensive income...........
Net income................... $ 8,266 8,266 8,266
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax.. 2,396 $2,396 2,396
---------
$10,662
---------- ------ ------- ========= ------ ------- --------- ------- ------
Balance - September 30, 1999... 11,503,904 5,752 67,365 2,396 38,716 4,282,217 (60,726) 53,503
Stock acquired................. 208,800 (3,551) (3,551)
Dividends declared ($.05/share) (343) (343)
Comprehensive income...........
Net income................... $ 259 259 259
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax.. 2,167 2,167 2,167
---------- ------ ------- --------- ------ ------- --------- ------- ------
Balance - December 31, 1999.... 11,503,904 $5,752 $67,365 $ 2,426 $4,563 $38,632 4,491,017 ($64,277) $52,035
========== ====== ======= ========= ====== ======= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month period ended December 31, 1999 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2000
or subsequent periods. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1999.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month periods ended December 31, 1999 and 1998 and
for a fair statement of financial position at December 31, 1999.
Note 2 - September 30, 1999 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1999
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, 1999.
Note 3 - Discontinued Operations
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets and the purchasers
had assumed all related liabilities, including contingent environmental
liabilities. In addition, Powerine Oil Company ("Powerine"), one of the
Company's refining subsidiaries, merged into a subsidiary of the purchaser and
is no longer a subsidiary of the Company. The Company's remaining refining
subsidiaries own no refining assets and are in the process of liquidation. As a
result, the Company has accounted for its refining operations as discontinued
operations. Such discontinued refining operations have not impacted the
Company's operations since September 30, 1995 although they may impact the
Company's future operations.
Note 4 - Contingencies/Litigation
Contingent Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
were potentially liable for environmental costs related to air emissions, ground
and water contamination, hazardous waste disposal and third party claims related
to the foregoing. Between September 29, 1995 and December 12, 1995 both of the
refineries owned by the Company's refining subsidiaries were sold to outside
parties. In each case the purchaser assumed all environmental liabilities.
Furthermore, on January 16, 1996, Powerine, the subsidiary that previously owned
a refinery in Santa Fe Springs, California ("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. 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"), an inactive subsidiary of the Company since
September 30, 1995. Neither the Company nor IRLP was named with respect to these
specific matters.
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.
In November 1999, the Company received a request for information from
the EPA concerning the Company's involvement in the ownership and operation of
the Indian Refinery. The Company responded to the EPA information request in
January 2000.
As of February 11, 2000, 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 the United States Bankruptcy Code and later sold the Indian
Refinery to another unrelated party. The new owner is in the process of
dismantling much of the Indian Refinery. Estimated undiscounted clean-up costs
for the Indian Refinery are $80,000 to $150,000 according to third parties.
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
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
the process of liquidation. The current owner of the Indian Refinery is
dismantling it. The current owner of the Powerine Refinery is reported to be
continuing to seek financing to restart that refinery. Furthermore, as noted
above, the Company and two of its subsidiaries have been named by the EPA as
potentially responsible parties for the remediation of the Indian Refinery.
If funds for environmental clean-up are not provided by former and/or
present owners of the refineries, 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 or any of its former or current refining
subsidiaries occur, the Company would probably incur substantial legal fees and
experience a diversion of management resources from other operations. A decision
by the U.S. Supreme Court in June 1998, however, supports the Company's
position.
Litigation
There have been no material litigation developments since those reported
in Item 3 of the Company's Form 10-K for the year ended September 30, 1999.
Note 5 - New Accounting Pronouncements
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 (not included in
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, is
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. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company anticipates
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
that it will adopt SFAS 133 effective October 1, 2000. The Company has not yet
determined the impact of SFAS 133 on its financial condition or results of
operations.
All hedging by the Company through June 30, 1999 was applicable to the
Company's gas marketing operations. Hedging transactions applicable to gas
marketing operations terminated on May 31, 1999 when all of the Company's
long-term gas contracts terminated. The Company, however, acquired substantial
oil and gas reserves from AmBrit Energy Corp. ("AmBrit") in June 1999 and began
hedging its crude oil and natural gas production (see Note #6).
The Company will continue to account for its crude oil and natural gas
hedges pursuant to Statement of Financial Accounting Standards No. 80,
Accounting for Futures Contracts ("SFAS 80") until SFAS 133 becomes effective
for the Company.
Note 6 - Derivative Financial Instruments
Until June 1, 1999, the Company's natural gas marketing subsidiaries
utilized futures contracts and natural gas basis swaps to reduce their exposure
to changes in the market price of natural gas. Effective May 31, 1999, all
natural gas marketing contracts terminated. As a result of these hedging
transactions, the cost of gas purchases increased $144 for the three month
period ended December 31, 1998.
On June 1, 1999, the Company acquired all of the oil and gas assets of
AmBrit. In July 1999, the Company hedged approximately 69% of its anticipated
consolidated crude oil production (approximately 32,000 barrels per month) and
approximately 50% of its anticipated consolidated natural gas production
(approximately 300,000 mcf per month) for the period from September 1, 1999 to
July 31, 2000. The Company used futures contracts to hedge such production. The
average hedged prices for crude oil and natural gas, which are based upon
futures prices on the New York Mercantile Exchange, were $20.02 per barrel of
crude oil and $2.64 per mcf of gas. For the three months ended December 31,
1999, oil and gas sales decreased $331 as a result of hedging activities.
Note 7 - Information Concerning Reportable Segments
During the three month period ended December 31, 1998, the Company
operated in two segments of the energy industry: oil and gas exploration and
production and natural gas marketing. During the three months ended December 31,
1999, the Company operated in only one segment of the energy industry - oil and
gas exploration and production. The Company does not allocate interest income,
interest expense or income tax expense to these segments. The operating income
(loss) achieved by each of the Company's segments was as follows:
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31, 1999:
Operating
Segment Revenues Expenses Income
------- -------- -------- -------
<S> <C> <C> <C>
1. Oil and gas exploration and
production................................. $ 4,259 ($ 3,319) $ 940
======= ======= ======
Three months ended December 31, 1998:
Operating
Segment Revenues Expenses Income (Loss)
------- -------- -------- -------------
1. Oil and gas exploration and
production................................. $ 481 ($ 508) ($ 27)
2. Natural gas marketing......................... 20,455 (15,860) 4,595
------- ------- -------
$20,936 ($16,368) $4,568
======= ======= ======
</TABLE>
The individual components of revenue and expenses for each segment are
set forth in the attached "Consolidated Statements of Operations."
Total assets applicable to each of the Company's two operating segments
were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------- -------------
<S> <C> <C>
Oil and gas exploration and production............................. $83,291 $ 79,076
Natural gas marketing.............................................. 67,627 67,720
Corporate and intercompany adjustments............................. (92,415) (86,000)
------- --------
$58,503 $ 60,796
======= ========
</TABLE>
Note 8 - Stock Split
On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The additional shares were paid on January 31, 2000
and the Company's shares first traded at post split prices on February 1, 2000.
The stock split applied only to the Company's outstanding shares on January 12,
2000 (2,337,629 shares) and did not apply to treasury shares (4,491,017 shares).
As a result of the stock split 4,675,258 additional shares were issued and the
Company's common stock book value was increased $2,338 to reflect additional par
value applicable to the additional shares issued to effect the stock split. All
share changes, including those affecting the recorded book value of common
stock, have been recorded retroactively.
-9-
<PAGE>
Note 9 - Subsequent Events
In January 2000, the Company invested $500 in notes due from Penn
Octane Corporation ("Penn Octane"), a public company involved in the
transportation and sale of liquid petroleum gas in Northern Mexico. The notes
are due on December 15, 2000 and bear interest at 9% payable semi-annually. The
notes are secured by certain assets of Penn Octane. In addition, the Company
received options to acquire 31,250 shares of the common stock of Penn Octane at
$4.00 per share. If the notes are not repaid by September 15, 2000, the Company
is entitled to receive options to acquire an additional 31,250 shares of Penn
Octane common stock at $4.00 per share. This investment in Penn Octane notes is
in addition to the Company's previous investment in the common stock of Penn
Octane.
-10-
<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(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. During the quarter ended December 31, 1998,
the Company was engaged in natural gas marketing and oil and gas exploration and
production. During this period revenues from natural gas marketing operations
aggregated $20,455 while those from the Company's exploration and production
operations aggregated only $481. On May 31, 1999, the Company's natural gas
marketing operations ended because of the contractual expiration of the
Company's subsidiaries' natural gas marketing gas contracts. On June 1, 1999,
however, the Company acquired all of the oil and gas assets of AmBrit. The
production associated with AmBrit's oil and gas properties approximated 425% of
the Company's oil and gas production prior to the acquisition. As a result of
the foregoing the Company was engaged in only exploration and production for the
quarter ended December 31, 1999 and comparison of the Company's operations for
the quarter ended December 31, 1998 with those for the quarter ended December
31, 1999 is neither meaningful nor applicable to the Company's expected future
operations. Accordingly, we have analyzed and discussed the Company's
exploration and production operations for the quarter in terms of key statistics
and ratios and discussed the significance of such statistics and ratios to the
Company's future exploration and production operations. Conversely, for the
other components of operations and net income (corporate general and
administrative expenses, other income and income tax provisions) we have
continued to compare fiscal 1999 results with fiscal 1998 results because
changes in these components are not substantially related to the Company's
change in emphasis from natural gas marketing to exploration and production.
Instead, changes in these components are primarily related to other factors.
Exploration and Production
Key exploration and production data for the quarter ended December 31,
1999 are as follows:
Three Months Ended
December 31, 1999
------------------
Production Volumes:
Barrels of crude oil (net).................................. 91,714
Mcf (thousand cubic feet) of natural gas (net).............. 1,108,491
Mcf equivalents (net) *..................................... 1,658,775
Oil/Gas Prices:- Crude Oil/Barrel:
Gross.................................................... $ 19.41
Hedging effects.......................................... (0.89)
----------
Net of hedging........................................... $ 18.52
==========
-11-
<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(Unaudited)
Three Months Ended
December 31, 1999
------------------
Natural Gas/Mcf:
---------------
Gross......................................................... $ 2.38
Hedging effects............................................... (0.23)
------
Net of hedging................................................ $ 2.15
=======
Oil and Gas Production Expenses/Mcf Equivalent......................... $ 0.93
=======
Depreciation, Depletion and Amortization Per Mcf Equivalent............ $ 0.72
=======
- ------------
* Barrels of crude oil have been converted to MCF based upon
relative energy content of 6 MCF of natural gas per barrel of
crude oil.
Production volumes slightly exceeded those estimated by the Company's
independent petroleum reserve engineers in their reports as of September 30,
1999. Such volumes averaged 997 barrels of crude oil and 12,048 mcf of natural
gas per day for the quarter. During the quarter the Company invested $6,095 in
the acquisition of oil and gas reserves and new drilling. Most of this
investment occurred near the end of the quarter and did not significantly
increase production for the quarter but is expected to increase production in
the future.
For the quarter, the average price received per barrel of crude oil,
net of an $.89/barrel loss due to hedging, was $18.52. The hedging loss resulted
because the Company had hedged approximately 69% of its expected crude oil
production using fixed price sales contracts based upon New York Mercantile
Exchange prices at a lower price than the price it paid several months later to
buy offsetting crude oil contracts and settle its hedges. The Company believes
that the average price it receives for its crude oil production is approximately
$2.00 less than the average price for crude oil traded on the New York
Mercantile Exchange.
In December 1999 and January 2000, crude oil prices increased
significantly. Whereas, the Company has hedged the sale of 154,000 barrels of
crude oil at an average price of $19.66 per barrel for the period from January
1, 2000 to July 31, 2000, the current average price for a barrel of crude oil
during this period is $26.57. If the Company were to settle these contracts at
the average $26.57 price, its oil sales would decrease by $1,064. As a result,
during this period, the Company expects that any higher prices it receives in
the field for the 154,000 barrels that have been hedged will be offset by
hedging losses. Since the Company expects to produce approximately 250,000
barrels during this seven-month period ended July 31, 2000, the Company
currently remains unhedged on the excess 96,000 barrels for the seven months
ended July 31, 2000 and for all expected production thereafter. The Company is
currently considering hedging some or all of such anticipated crude oil
production. To the extent such anticipated production is not hedged, crude oil
sales will depend upon the field
-12-
<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(Unaudited)
prices at which the Company sells its crude oil. In the last year such prices
have increased over 50% and in recent years such price have changed
significantly over short periods of time. The Company thus remains exposed to
crude oil price risks on this unhedged expected crude oil production.
For the quarter, the average price received per mcf of natural gas was
$2.15, net of a $.23/mcf hedging loss. For the quarter, the Company produced an
average of approximately 12,000 mcf per day. As a result of acquisitions and new
drilling near the end of the quarter, the Company expects that future natural
gas production will average approximately 13,000 mcf/day for the remainder of
fiscal 2000. The Company has not hedged such anticipated natural gas production
and thus remains exposed to future increases or decreases in natural gas prices.
If prices increase, the Company's natural gas sales are expected to increase.
Conversely, if such prices decrease, the Company's natural gas sales are
expected to decrease. Although natural gas prices have recently increased
significantly as a result of several factors, including colder weather, there
can be no assurance that such prices will not decrease in the future. Natural
gas prices have frequently changed significantly over short periods in recent
years.
Oil and gas production expenses for the quarter averaged $.93 per Mcf
equivalent produced. During fiscal 1999, oil and gas production expenses per mcf
equivalent averaged $.88. The Company believes that this relatively high unit
cost results from the fact that a higher proportion of the properties acquired
from AmBrit are operated by outside parties who charge operating fees to operate
the related wells in which the Company has an interest and that some of these
operating fees are high. The Company is currently considering selling several
marginal properties in which it has an interest and believes that such sales, if
consummated, would reduce the production cost per mcf equivalent in the future.
Furthermore, the Company has recently completed a higher than normal number of
non capitalized repairs and maintenance operations on wells acquired from AmBrit
and believes that the level of repairs and maintenance may decrease as a result
in the future. Finally, oil and gas production expenses, especially
non-capitalized repairs, generally do not occur evenly throughout the year and
are best compared on an annual or on a cumulative basis. Nevertheless, there can
be no assurance that production expenses will decrease absolutely or per mcf
equivalent produced in the future. Since the Company has acquired several new
properties and drilled several wells in the quarter, such expenses will increase
simply because the Company owns interests in more producing wells and larger
interests in some existing wells.
The depletion rate per mcf equivalent produced for the quarter was
determined to a large extent by the price the Company paid for AmBrit's oil and
gas properties. The rate will change based primarily upon the cost at which the
Company acquires or drills for and finds oil and gas reserves in the future and
the Company's estimated proved oil and gas reserves. The Company's independent
reservoir engineers evaluate the Company's reserves annually in conjunction with
the Company's annual audit.
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<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(Unaudited)
Other Components of Operations
Corporate, general and administrative expenses decreased $205 or 18.4%
from the quarter ended December 31, 1998 to the quarter ended December 31, 1999
primarily because of decreased insurance and legal costs. The $205 decrease in
corporate, general and administrative expenses was, however, offset by an
increase of $251 in exploration and production general and administrative
expenses. A significant portion of the general and administrative expenses
allocated to corporate overhead in fiscal 1998 have been allocated to
exploration and production general and administrative costs in fiscal 1999 and
are expected to be so allocated in the future.
Interest income decreased $268 or 57.4% from the first quarter of
fiscal 1998 to the first quarter of fiscal 1999. The decrease is primarily
attributable to a decrease in the average balance of cash outstanding during the
periods being compared.
The tax provision for the quarter ended December 31, 1998 essentially
represents the amortization of the Company's net deferred tax asset at an
effective rate of 36% of pre-tax book income. The tax provision for the quarter
ended December 31, 1999 essentially represents Federal alternative minimum taxes
at an effective rate of 2%. The Company has not recorded its tax provision at a
higher tax rate because it has sufficient Federal and state tax carryforwards to
offset pre-tax income and because it did not record a net deferred tax asset to
amortize at September 30, 1999 as it did at September 30, 1998 because it
determined that future taxable income was less certain given the Company's large
exploratory and wildcat drilling programs and contingent environmental
liabilities and other factors. The 2% Federal alternative minimum tax is payable
despite the Company's tax carryforwards which offset regular Federal corporate
tax. The Company anticipates that for fiscal 2000 its existing tax carryforwards
will offset Federal and state taxes otherwise due on pre-tax income with the
exception of Federal alternative minimum taxes. If future events change the
Company's estimate concerning the probability of utilizing its tax assets,
appropriate adjustments will be made when such a conclusion is reached.
Earnings per Share
On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The effect of the stock split was to triple the
number of shares outstanding. The stock split did not apply to the Company's
treasury stock. The stock split is reflected retroactively in share amounts and
earnings per share computations in the accompanying financial statements.
In addition, since January 1, 1999, the Company has reacquired 628,100
shares of its common stock. As a result of these share acquisitions, earnings
per outstanding share have been higher than would be the case if no shares had
been repurchased.
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
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<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(Unaudited)
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.
During the quarter ended September 31, 1999, the Company generated $173
from operating activities. During the same period the Company invested $6,095 in
oil and gas properties and $3,551 to reacquire shares of its common stock. In
addition, it paid $368 in stockholder dividends. At December 31, 1999, the
Company had $12,389 of unrestricted cash, $20,176 of working capital and no
long-term debt.
Discontinued Refining Operations
Although the Company's former and present subsidiaries have exited the
refining business and third parties have assumed environmental liabilities, if
any, of such subsidiaries, the Company and several of its subsidiaries remain
liable for contingent environmental liabilities (see Item 3 to the Company's
Form 10-K for the year ended September 30, 1999 and Note 4 to Part I of this
Form 10-Q.)
Expected Sources and Uses of Funds
As of February 11, 2000, the estimated future cash expenditures of the
Company for the next two fiscal years consist of the following:
a. Investments in Oil and Gas Properties and Other Energy Sector
Ventures
1. Development drilling on existing acreage..............$ 3,300
2. South Texas exploratory drilling ventures.............. 5,400
3. Romanian concession ................................... 1,900
-------
$10,600
=======
If the initial drilling results in the South Texas drilling
ventures are less favorable than anticipated, the Company expects
to be able to reduce this drilling commitment by approximately
$4,000. Conversely, if the initial results are better than
expected the Company may participate in the drilling of more wells
than budgeted above. If the initial wildcat Romanian wells are
successful, the Company may also increase its investment in that
country significantly and could conceivably spend $10,000-$15,000
if new oil and gas fields are discovered.
While the Company anticipated drilling up to 100 new wells in its
Appalachian drilling joint venture, the Company has participated
in the drilling of only twenty wells to date. Based upon the
results achieved to date, the Company expects that it will
participate in only a few additional Appalachian wells each year
rather than in the number originally planned.
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<PAGE>
Castle Energy Corporation
(Dollars in Thousands Except Per Unit Data)
(Unaudited)
In addition, 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 operations. Although
most of these possible investments involve domestic properties,
some involve investments overseas. Although the Company has
recently concluded several transactions and believes it can
conclude several additional 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 have decided not to sell or have not been forced
to sell by their lenders. In addition, several sellers have raised
the price for the oil/gas properties they are selling given
currently high oil and gas prices and the acquisition of such
properties at such high prices would not be in the Company's best
interest. 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 February 11, 2000, the
Company had repurchased 4,491,017 of its shares of common stock at
a cost of $64,277. The Company's Board of Directors previously
authorized the repurchase of up to 4,750,000 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
4,750,000 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.
The treasury shares repurchased by the Company through December
31, 1999 were not affected by the Company's stock split.
c. Recurring Dividends - the Company's Board of Directors adopted a
policy of paying a $.20 per share annual dividend ($.05 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.
At December 31, 1999, the Company had available the following sources
of funds:
Unrestricted cash - December 31, 1999................................... $12,389
Line of credit - energy bank............................................ 30,000
Marketable securities................................................... 6,406
-------
$48,795
=======
In addition, the Company anticipates significant future cash flow from
exploration and production operations.
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<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Risks
The estimated sources of funds are subject to most of the risks
enumerated below. The realization from the sale of the Company's investment in
Penn Octane is dependent on the market value of such stock and the Company's
ability to liquidate its Penn Octane stock investment at or near market values.
Since Penn Octane is thinly capitalized and traded, liquidation of a large
volume of Penn Octane stock, such as that owned by the Company, without
significantly lowering the market price may be impossible.
The Company thus expects that it can fund all of its present drilling
commitments from its own unrestricted cash. The Company can also use its
unrestricted cash and future cash flow, as well as up to $30,000 from its line
of credit, to acquire additional oil and gas properties and to conduct
additional drilling. As a result, the Company believes it has available the
financing to make additional future acquisitions of up to approximately
$40,000-$50,000 while still funding its existing drilling commitments. The
Company has also negotiated with several potential industry partners who may
provide financing if the Company decides to make an acquisition for prices in
excess of these amounts.
The foregoing discussions do not contemplate any adverse effects from
the risk factors listed below:
a. Contingent environmental liabilities.
b. Litigation - Long Trusts litigation and Rex Nichols litigation.
c. Reserve price risk - the effect of price changes on unhedged oil
and gas production.
d. Exploration and production reserve risk - the effect of not
finding the oil and gas reserves sought during new drilling -
especially given the high percentage of exploratory drilling in
which the Company is participating.
e. Reserve risk - the effect of differences between estimated and
actual reserves and production.
f. Public market for Company's stock.
g. Future of the Company.
h. Foreign operation risks. Since the Company has already incurred
$1,550 and expects to spend at least $2,000 in the next year to
drill 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.
i. 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.
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<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
The Company spent approximately $120 and devoted significant management
resources to insure that it did not have any Year 2000 problems. No such
problems materialized.
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
financial position, cash flow and results of operations will probably be
adversely impacted and the impact may be material. 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 adversely impact the Company's
operations.
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<PAGE>
Castle Energy Corporation and Subsidiaries
(Dollars in thousands)
(Unaudited)
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the Company had hedged 154,000 barrels of crude
oil that it expects to produce from January 1, 2000 to July 31, 2000 using
futures contracts. The average hedged price (based upon prices on the New York
Mercantile Exchange ("NYMEX")) for these hedged barrels is $19.66 per barrel.
The current average settlement price for crude oil for this time period is
$26.57 per barrel. Accordingly, if the Company settled all of its crude oil
hedges at the current settlement price, its crude oil sales would decrease by
approximately $1,064. Although the price the Company receives for its production
is less than NYMEX pricing due to location basis differentials, the Company's
management believes that NYMEX pricing is highly correlated to its production
field prices. Accordingly, management expects that any changes in NYMEX prices
will be offset by similar changes in the field prices the Company receives for
is production. If NYMEX prices increase or decrease ten percent, management
expects that the Company's field prices would also increase or decrease
approximately ten percent.
Excluding the 154,000 barrels of hedged crude oil production above,
which constitute approximately 62% of the Company's expected crude oil
production during this period, the Company has not hedged its remaining expected
crude oil production or any of expected natural gas production. As a result, the
Company remains at risk with respect to such unhedged expected production. If
oil and gas market prices increase, oil and gas sales applicable to the unhedged
production will increase. If oil and gas market prices decrease, oil and gas
sales related to such unhedged production will decrease.
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<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,
1999. Also see Note 4 to the attached December 31, 1999 financial statements
included in Part I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 10.133 - Asset Acquisition Agreement between Castle Exploration
Company, Inc., Deerlick Creek Partners, I., L.P. and
Deven Resources, Inc. effective September 1, 1999
Exhibit 10.134 - Purchase and Sale Agreement, dated December 15, 1999,
between Whiting Park Production, Ltd. and Castle
Exploration Company, Inc.
Exhibit 10.135 - Asset Acquisition Agreement between Castle Exploration
Company, Inc. and American Refining and Exploration
Company, Deven Resources Inc., CMS/Castle Development
Fund I L.P., Effective as of October 1, 1999
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 13, 2000 CASTLE ENERGY CORPORATION
-----------------
/s/Richard E. Staedtler
--------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
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<PAGE>
ASSET ACQUISITION AGREEMENT
BETWEEN
CASTLE EXPLORATION COMPANY, INC.
DEERLICK CREEK PARTNERS, I, L.P.
AND
DEVEN RESOURCES, Inc.
EFFECTIVE AS OF SEPTEMBER 1, 1999
<PAGE>
THIS AGREEMENT, dated October ___ 1999, but effective as of September
1, 1999 ("Effective Date"), by and among Deerlick Creek Partners, I, L.P. a
Delaware limited partnership ("DCP"), Deven Resources, Inc., a Pennsylvania
corporation ("DRI"), whose collective address is Suite 615, 983 Old Eagle School
Road, Wayne, Pennsylvania, 19087 (DCP and DRI are sometimes collectively
referred to as the "Seller"), and CASTLE EXPLORATION COMPANY, INC., a Delaware
corporation, whose address is 531 Plymouth Road, Suite 525, Plymouth Meeting,
Pennsylvania 19462 (the "Buyer").
WITNESSETH
WHEREAS, the DRI owns an undivided interest in certain occluded coalbed
methane leases, Wells Pipelines, Oil and Gas Contracts, desalination ponds and
the equipment used thereon and appurtenant thereto all of which are located in
Tuscaloosa County, Alabama ("Assets"); and
WHEREAS, DRI is the managing general partner of DCP; and
WHEREAS, DCP owns a net profits interest in the Assets; and
WHEREAS, the Seller desires to sell and convey and Buyer desires to
purchase and acquire the Assets, effective as of the Effective Date; and
WHEREAS, the assets are subject to a "Right of First Refusal" in favor
of DeGas, an Alabama partnership, successor in interest to DeGas, Inc, an
Alabama corporation ("DeGas"), under that certain agreement dated as of August
20, 1982 by and among DeGas and TRW, Inc. predecessor in interest to Seller
("TRW Agreement").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
<PAGE>
ARTICLE I - DEFINITIONS
1. The following terms shall have the meanings ascribed to them below when
used in this Agreement:
1.1. "Agreement", shall mean this Asset Acquisition Agreement.
1.2. "Assignment" or "Assignments" shall mean those Assignments and
Bills of Sale in substantially in the form of Exhibit "A". The Assignments
shall contain special warranty deed language, conveying the Assets without
warranty, either expressed or implied, except those claiming by, through or
under the Seller, but not otherwise, with full substitution and subrogation all
as more particularly set forth in the Agreement, with all Equipment conveyed "AS
IS" and "WHERE IS" WITHOUT WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR
MERCHANTABILITY.
1.3. "Closing", shall mean the consummation of the transactions
contemplated by this Agreement.
1.4. "Closing Date", shall mean the earlier of (i) sixty (60) days
after the submittal of the Agreement to DeGas under Paragraph 16 of the TRW
Agreement or (ii) receipt of DeGas's waiver of its Right of First Refusal, but
in no event shall the Closing Date be later than December 31, 1999.
1.5. "Effective Date", shall mean 7:01 a.m. local time, September 1,
1999 where the Oil and Gas Properties are located.
1.6. "Encumbrance", shall mean any mortgage, lien, security interest,
pledge, charge, encumbrance, claim, limitation, irregularity, burden,
hypothecation or defect.
1.7. "Environmental Condition", shall mean any existing condition of
the soil, subsurface, surface waters, ground waters, atmosphere or other
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<PAGE>
environmental medium, whether or not yet discovered, which could reasonably be
expected to result in any damage, loss, cost, expense, claim, demand,
investigation, lien or liability relating to the Assets under any Environmental
Statute.
1.8. "Environmental Statute", shall mean the Resource Conservation and
Recovery Act of 1976, as amended prior to the Closing Date, the Clean Air Act,
as amended prior to the Closing Date, the Clean Water Act, as amended prior to
the Closing Date, and the Comprehensive Environmental Response, Compensation and
Liability Act, as amended prior to the Closing Date, and all federal, state, and
other governmental regulations, orders, interpretations or rulings issued
thereunder prior to the Closing Date, and other Legal Requirements relating to
air or water quality, hazardous or solid wastes, hazardous substances or any
other environmental matters.
1.9. "Execution Date", shall mean October 22, 1999.
1.10. "Existing Burdens", shall mean Lease Burdens and Permitted
Encumbrances of record as of the Effective Date or of which Buyer has received
written notice as of the Execution Date.
1.11. "Final Settlement Statement", shall mean that Final Settlement
Statement as provided for in Paragraph 9.8.
1.12. "Lease Operating Expenses", shall mean any and all costs and
expenses properly charged by the operator of the Assets pursuant to the
applicable operating agreement governing operations on such Assets, to include,
by way of example and not limitation, those charges and costs permitted under
Articles II and III of the COPAS accounting procedure attached to such operating
agreements as an exhibit.
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<PAGE>
1.13. "Legal Requirements", shall mean any law, statute., ordinance,
decree, requirement, order, judgment, rule or regulation including by way of
example and not limitation the terms of any license, permit, certificate, or
abandonment approval promulgated prior to, or at the time of the Closing Date,
by any governmental authority to include, without limitation, any bonding
requirements of Buyer or other regulatory approval governing the transfer of
operations to Buyer.
1.14. "Oil and Gas Contracts", shall mean any contracts that affect or
relate to the Oil and Gas Properties or the Production covered thereby including
amendments thereto. "Oil and Gas Contracts" includes, by way of example and not
limitation, area of mutual interest agreements, acreage contribution agreements,
advance payment agreements, bottom hole agreements, division orders, drilling
contracts, dry hole agreements, exploration agreements, farm-in and farm-out
agreements, Gas Balancing Agreements (including claims to recover natural gas
or money under Gas Balancing Agreements for Seller's under production before the
Effective Date), natural gas and oil sales, exchange, treating and processing
contracts, operating agreements, net profits agreements, participation
agreements, storage agreements, support agreements, transfer orders,
transportation agreements, water rights agreements, and salt water disposal
agreements.
1.15. "Ordinary Course of Business", shall mean the ordinary course of
business and conduct of operations consistent with past custom and practice,
and shall include, without limitation, operations of a kind and nature conducted
in a manner consistent with those of a reasonably prudent operator in the same
or similar circumstances.
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<PAGE>
1.16. "Permitted Encumbrances", shall mean those Encumbrances as may
exist on the Oil and Gas Properties from time to time in the Ordinary Course of
Business, to include, by way of example and not limitation: liens for Taxes not
yet due and payable, or if due and payable, are being contested in good faith in
the Ordinary Course of Business, inchoate, statutory or operators liens securing
obligations for labor, services, materials and supplies furnished to the Oil and
Gas Properties, but only if such liens are not delinquent and will be discharged
in the Ordinary Course of Business; Encumbrances that arise under Oil and Gas
Contracts of a type and nature customary in the oil and gas industry to secure
the payment of amounts that are not yet delinquent or, if delinquent, are being
contested in good faith in the Ordinary Course of Business; Encumbrances that
arise as a result of unit or communization agreements, Oil and Gas Contracts,
orders and laws. Provided, however, that any Encumbrances placed on the Assets
as a direct result of: (i) an action or inaction taken by Seller based upon the
recommendation of Buyer; or (ii) Buyer's having taken an action which was not
authorized by Seller and which was beyond Buyer's authorized scope of its
management services, shall be deemed a Permitted Encumbrance.
1.17. "Person", shall mean an individual, group, partnership,
corporation, trust, Limited Liability Company or other entity.
1.18. "Pipeline", shall mean the gas gathering system located on the
Oil and Gas Properties as well as Seller's interest in the desalination ponds
located on the Oil and Gas Properties.
1.19. "Production", shall mean all hydrocarbons produced, saved and
sold from the Assets.
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<PAGE>
1.20. "Taxes", shall mean all ad valorem, severance, and other taxes or
fees levied upon or measured by Production, personal property taxes, real
property taxes, and any and all other taxes or fees of whatever type or kind
assessed or which are attributable to the ownership of the Assets.
1.21. "Wells", shall mean Seller's interest in those wells set forth on
Schedule 1.21 hereto.
ARTICLE II - PURCHASE AND SALE OF THE ASSETS
2.1. Transfer. Subject to the term of this Agreement, Seller hereby
agrees to sell, transfer, convey and deliver unto the Buyer, and Buyer hereby
agrees to purchase, acquire and accept, all of the Seller's right, title and
interest in and to the Assets, effective as of the Effective Date.
2.2. Closing. At the closing, subject to the provisions of Article
VII., the Buyer will deliver to Seller the Purchase Price in accordance with
Article III below, on the Closing Date.
2.3. Assignments. Subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties contained herein, at
Closing, Seller shall convey, transfer, assign and deliver all of the Seller's
right, title and interest in and to the Assets (by executing and delivering one
or more counterparts of the Assignment, together with a description of the
respective Assets attached thereto) to Buyer. The Assignment shall provide for a
Special Warranty of title to the Assets by, through and under the Seller, but
not otherwise.
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<PAGE>
ARTICLE III - PURCHASE PRICE
3. Price. The purchase price for the Assets (the "Purchase Price")
shall be One Million Four Hundred Twenty Four Thousand Two Hundred Ninety Eight
Dollars and forty nine cents ($1,424,298.49).
3.1. Manner of Payment. At the Closing, subject to the provisions of
Article VII below, the Buyer will wire transfer to Seller's account the Purchase
Price, less:
3.1.1. any and all amounts due and owing Pennsylvania Castle
Energy Corporation ("PACEC") by Seller for Lease Operating Expenses prior to the
Effective Date as well as royalty burdens attributable to Production prior to
the Effective Date and which were actually paid by PACEC on behalf of Sellers
for which PACEC has not been repaid as of the Closing Date; and
3.1.2. an amount equal to the Seller's portion, of the settlement
with Sonat under that contract dated September 4, 1982 estimated to be Eighty
Eight Thousand Dollars ($88,000). The amount withheld for the Seller's Sonat
settlement will be placed in escrow with Seller's counsel and shall be governed
by the terms of an escrow agreement to be entered into between Seller and PACEC.
3.2. Allocation of Revenues and Assumption of Liabilities. Subject to
the terms and provisions hereof, as of the Effective Date:
3.2.1. Buyer purchases., acquires and assumes the liabilities and
obligations pertaining to the Assets which accrue on and after the Effective
Date (to include by way of example and not limitation, all obligations: (i)
associated with any Environmental Condition; (ii) under the leases which
constitute a portion of the Oil and Gas Properties; (iii) under the Oil and Gas
Contracts; and (iv) other Legal Requirements), as evidenced by the execution of
this Agreement and the execution and
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<PAGE>
acceptance of each Assignment, but excluding however: (x) liabilities and
obligations of Seller pertaining to the Assets, either incurred or accruing
prior to the Effective Date; or, (y) liabilities or obligations arising from a
breach of any the obligations of Seller under this Agreement.
3.2.2. Seller shall retain and bear the liabilities and
obligations pertaining to Seller's actions pertaining to the Assets, (to
include, by way of example and not limitation: (i) costs of any other contract
or document to which Seller is a party, as of the Effective Date; or (ii)
payments to any third party, to include the Sonat contract through September 4,
1999, other than a lease burden, delay rental or shut in royalty payment) and
arising and/or incurred prior to the Effective Date (whether or not actually
invoiced or billed prior to or subsequent to the Effective Date), excluding
however: (x) liabilities specifically assumed by the Buyer under this Agreement;
and (y) liabilities arising from a breach of any of Buyer's obligations under
this Agreement. It is expressly agreed and understood that the settlement
obligation under the Sonat contract shall be deemed to be a pre-Effective Date
obligation of the Seller.
3.2.3. Seller shall receive all proceeds of Production
actually sold and delivered before the Effective Date., and Buyer shall receive
all proceeds of Production as of and after the Effective Date.
3.2.4. Seller shall receive all revenues and benefits
attributable to the Assets relating to the period prior to the Effective Date
and Buyer shall receive all revenues and benefits attributable to the Assets
relating to the period commencing as of the Effective Date.
3.2.5. Taxes assessed against the Assets shall be pro rated at
the Closing Date as of the Effective Date.
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<PAGE>
ARTICLE IV - DRI'S REPRESENTATIONS AND WARRANTIES
4. DRI represents and warrants to Buyer as of the Execution Date and as of
the Closing Date, as follows:
4.1. Organization. DRI is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation
and in each jurisdiction where it is required for the conduct of its business.
4.2. Authority. DRI has all requisite power and authority to carry on
its business as presently conducted, to enter into this Agreement to sell the
assets on the terms described in this Agreement, and to perform its obligations
under this Agreement. Upon the receipt of DeGas's waiver of its Right of First
Refusal or expiration of the period in which DeGas has the right to exercise its
Right of First Refusal, the consummation of the transaction contemplated by this
Agreement will not violate, nor be in conflict with, any provisions of its
Certificate of Incorporation or other governing document of DRI., or any
material agreement or instrument to which DRI is a party or by which DRI or any
of the Assets is bound, or any judgment, decree, order, statute, rule or
regulation applicable to Seller or any of the Assets.
4.3. Binding Obligation. This Agreement has been duly executed and
delivered on behalf of DRI. All documents and instruments required hereunder to
be executed and delivered to Buyer shall have been duly executed and delivered.
This Agreement does, and such document and instrument will, constitute legal,
binding obligations of the Seller in accordance with their terms.
4.4. No Breach of Statute, Decree or Contract. The execution, delivery
and performance of this Agreement by DRI does not and will not, after receipt
of DeGas's waiver of its Right of First Refusal or expiration of the period in
which DeGas
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has the right to exercise its Right of First Refusal, breach any Legal
Requirement, at the Closing conflict with or result in a breach of or default
under any agreement or any order, writ, injunction, decree, contract, agreement
or instrument to which DRI is a party or by which the Assets are or may be
bound, will not result in the creation or imposition of any lien, charge or
encumbrance of any nature upon any of the Assets, and will not give to others
any interest or rights in, or with respect to any of the Assets, except for
Permitted Exceptions.
4.5. No Litigation or Adverse Events. To the best of DRI's knowledge
there is no suit, claim or action, or legal, administrative, arbitration or
other proceeding, or governmental investigation, pending or, to DRI's knowledge,
threatened, by or against DRI or the Assets, and no event or condition of any
character, to DRI's knowledge, pertaining to DRI or Assets, that could prevent
the consummation of the transactions contemplated by this Agreement.
4.6. Permitted Encumbrances. To the best of DRI's knowledge, DRI has
not created any Permitted Encumbrances.
4.7. Taxes. DRI is not aware of any unpaid taxes relating to the
Assets.
4.8. Title. To the best of Seller's knowledge, the Assignments will
convey to Buyer, subject to Existing Burdens, Seller's right, title and
interests to the Assets. Other than the Existing Burdens, Seller has not created
any liens, claims or Encumbrances affecting the Assets. Seller shall provide a
Special Warranty of title to the assets to Buyer by, through and under Seller,
but not otherwise, with full power of substitution and subrogation.
EXCEPT FOR THE SPECIAL WARRANTIES OF TITLE GIVEN BY SELLER IN THE ASSIGNMENTS,
SELLER DISCLAIMS ANY WARRANTIES EXPRESS AND IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR
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FITNESS FOR A PARTICULAR PURPOSE (INCLUDING WARRANTIES WITH RESPECT TO THE
PRESENCE OF ENVIRONMENTAL CONDITIONS OR NATURALLY OCCURRING RADIOACTIVE MATERIAL
AFFECTING SUCH PERSONAL PROPERTY) OF ANY PROPERTY REAL, PERSONAL OR MIXED OR
EQUIPMENT (INCLUDING PIPELINE EQUIPMENT) CONVEYED TO AND ACQUIRED BY BUYER,
WITH ALL SUCH REAL AND PERSONAL PROPERTY AND EQUIPMENT BEING TRANSFERRED,
ASSIGNED, SOLD, PURCHASED, ACCEPTED AND ACQUIRED "AS IS" AND "WHERE IS,'
WITHOUT REPRESENTATION AS TO FITNESS FOR A PARTICULAR PURPOSE.
4.9. Status of Leases.
4.9.1. Working Interests. DRI's Working Interests in the Oil and
Gas Properties is represented on Schedule 1.21.
4.9.2. Net Revenue Interests. DRI's Net Revenue Interests in the
Oil and Gas Properties is represented on Schedule 1.21.
4.10. Necessary Action. DRI shall take or cause to be taken all
such actions, as would a prudent businessman under the same or similar
circumstances, as may be necessary and advisable to consummate and make
effective the sale of the Assets contemplated by this Agreement and to assure
that DRI will not be under any material corporate, legal or contractual
restriction that would prohibit or delay the timely consummation of such
transactions; provided, however, that DRI shall not be required to (i) file suit
or assume any additional liabilities in performing its obligations hereunder,
(ii) to perform any title curative, or (iii) take any action prior to the
receipt of DeGas's waiver of its preferential right to purchase.
4.11. Environmental Claims. To the best of Seller's knowledge there is
Environmental Condition in, on or under any of the Assets. Buyer is the
operator
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of the Assets and is aware of their condition by virtue of its operation and
inspection of the Assets.
ARTICLE V - DCP'S REPRESENTATION AND WARRANTIES
5. DCP represents and warrants to Buyer as of the Execution Date and the
Closing Date as follows:
5.1. Organization. DCP is a partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware and in
each jurisdiction where it is required for the conduct of its business.
5.2. Authority. DCP has all requisite power and authority to carry on
its business as presently conducted, to enter into this Agreement to sell the
assets on the terms described in this Agreement, and to perform its obligations
under this Agreement. Upon the receipt of DeGas's waiver of its Right of First
Refusal or expiration of the period in which DeGas has the right to exercise its
Right of First Refusal, the consummation of the transaction contemplated by this
Agreement will not violate, nor be in conflict with., any provisions of its
Partnership Agreement or other governing document of DCP, or any material
agreement or instrument to which DCP is a party or by which DCP or any of the
Assets is bound, or any judgment, decree, order, statute, rule or regulation
applicable to Seller or any of the Assets. DRI as the sole general partner of
DCP is authorized to represent DCP in this Asset Acquisition Agreement.
5.3. Binding Obligation. This Agreement has been duly executed and
delivered on behalf of DCP. All documents and instruments required hereunder to
be executed and delivered to Buyer shall have been duly executed and delivered.
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This Agreement does, and such document and instrument will, constitute legal,
binding obligations of the Seller in accordance with their terms.
5.4. No Breach of Statute. Decree or Contract. The execution, delivery
and performance of this Agreement by DCP does not and will not, after receipt of
DeGas's waiver of its Right of First Refusal or expiration of the period in
which DeGas has the right to exercise its Right of First Refusal, breach any
Legal Requirement, at the Closing conflict with or result in a breach of or
default under any agreement or any order, writ, injunction, decree, contract,
agreement or instrument to which DCP is a party or by which the Assets are or
may be bound, will not result in the creation or imposition of any lien, charge
or encumbrance of any nature upon any of the Assets, and will not give to others
any interest or rights in, or with respect to any of the Assets, except for
Permitted Exceptions.
5.5. No Litigation or Adverse Events. To the best of DCP'S knowledge
there is no suit, claim or action, or legal, administrative, arbitration or
other proceeding, or governmental investigation, pending or, to DCP's
knowledge, threatened, by or against DCP or the Assets, and no event or
condition of any character, to DCP's knowledge, pertaining to DCP or Assets,
that could prevent the consummation of the transactions contemplated by this
Agreement.
5.6. Taxes. DCP is not aware of any unpaid taxes relating to the
Assets.
5.7. Title. To the best of Seller's knowledge, the Assignments will
convey to Buyer, subject to Existing Burdens, all of DCP's right, title and
interest to the Assets without reservations. Other than the Existing Burdens,
Seller has not created any liens, claims or Encumbrances affecting the Assets
Seller shall provide a
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Special Warranty of title to the Assets to Buyer by, through and under Seller,
but not otherwise, with full power of substitution and subrogation.
EXCEPT FOR THE SPECIAL WARRANTIES OF TITLE GIVEN BY SELLER IN THE ASSIGNMENTS,
SELLER DISCLAIMS ANY WARRANTIES EXPRESS AND IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
(INCLUDING WARRANTIES WITH RESPECT TO THE PRESENCE OF ENVIRONMENTAL CONDITIONS
OR NATURALLY OCCURRING RADIOACTIVE MATERIAL AFFECTING SUCH PERSONAL PROPERTY) OF
ANY PROPERTY REAL, PERSONAL OR MIXED OR EQUIPMENT (INCLUDING PIPELINE
EQUIPMENT) CONVEYED TO AND ACQUIRED BY BUYER, WITH ALL SUCH REAL AND PERSONAL
PROPERTY AND EQUIPMENT BEING TRANSFERRED, ASSIGNED, SOLD, PURCHASED, ACCEPTED
AND ACQUIRED "AS IS" AND "WHERE IS" WITHOUT REPRESENTATION AS TO FITNESS FOR A
PARTICULAR PURPOSE.
5.8. Necessary Action. DCP shall take or cause to be taken all such
actions, as would a prudent businessman under the same or similar circumstances,
as may be necessary and advisable to consummate and make effective the sale of
the Assets contemplated by this Agreement and to assure that DCP will not be
under any material corporate, legal or contractual restriction that would
prohibit or delay the timely consummation of such transactions; provided,
however, that DCP shall not be required to (i) file suit or assume any
additional liabilities in performing its obligations hereunder, (ii) to perform
any title curative, or (iii) take any action prior to the receipt of DeGas's
waiver of its preferential right to purchase.
5.9. Permitted Encumbrances. To the best of DCP's knowledge, DCP has
not created any Permitted Encumbrances.
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5.10. Net Profits Interest. DCP's net profits interest in the Oil and
Gas Properties is represented on Schedule 1.21.
ARTICLE VI - THE BUYER'S REPRESENTATIONS AND WARRANTIES
6. The Buyer represents and warrants to Seller as of the Execution Date
and the Closing Date, as follows:
6.1. Corporate. The Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Pennsylvania. The Buyer has duly authorized the execution, delivery and
performance of this Agreement by all necessary corporate action, and the same is
a binding obligation of the Buyer, enforceable in accordance with its terms.
6.2. No Breach of Statute or Contract. The execution, delivery and
performance of this Agreement will not breach any statute or regulation of any
governmental authority, and will not at the Closing conflict with or result in
a breach of or default under any of the terms, conditions, or provisions of the
Buyer's Certificate of Incorporation or by-laws or any order, writ, injunction,
decree, agreement or instrument to which the Buyer is a party or by which it is
or may be bound.
6.3. Environmental Inspection. Buyer acknowledges that it has had ample
opportunity to inspect the Assets, has actually inspected the Assets and is
aware of their condition and status. In entering into this Agreement, Buyer is
relying exclusively on: (i) its own inspection, due diligence and knowledge of
the Assets; and (ii) that Phase I Environmental Site Assessment dated August 5,
1999 prepared by Highland Technical Services, Inc. and not on any statement or
representation of Seller with respect thereto. As of and subsequent to the
Effective Date, Buyer shall be fully and solely liable for any Environmental
Condition occurring after the Effective Date or
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environmental claim arising therefrom in respect of the Assets. Buyer
acknowledges that its affiliate PACEC has been the operator of the Assets since
October 1990.
6.4. Knowledgeable Buyer. Buyer is a knowledgeable purchaser, owner and
operator of oil and gas properties, is familiar with the Assets, has the
ability to evaluate (and in fact has evaluated) the Assets for purchase.
6.5. Conduct of Due Diligence. Buyer acknowledges that it has been
afforded the opportunity to and has conducted sufficient independent due
diligence concerning the Assets to be purchased. Buyer is acquiring the Assets
based solely on its knowledge of the Assets as operator and the owner of an
undivided working interest in the Assets and its own independent due diligence,
and not based upon any representation, statement or inducement of Seller, or
either of them.
ARTICLE VII - CONDITIONS TO THE BUYER'S OBLIGATIONS TO CLOSE
7. The Buyer's obligation to close shall be subject to the satisfaction of
the following conditions prior to or at the Closing, unless waived by the Buyer.
7.1. Compliance With Agreement. The Seller, and each of them, shall
have performed and complied in all respects with all his obligations under this
Agreement which are to be performed or complied with by it prior to or at the
Closing.
7.2. Litigation. No litigation or other proceeding shall have been
commenced or threatened against the Buyer or the Seller, which in the sole
opinion of the Buyer would materially and adversely affect its ownership, or the
value, of the Assets.
7.3. DeGas Waiver. Either Seller shall have received from DeGas a
waiver of DeGas's preferential right to purchase the Assets, or DeGas's sixty
(60) day period in which to evoke its Right to First Refusal shall have expired.
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ARTICLE VIII - CONDITIONS TO THE SELLER'S OBLIGATION TO CLOSE
8. The Seller's obligation to close shall be subject to the satisfaction
of the following conditions prior to or at the Closing, unless waived by the
Seller:
8.1. Compliance With Agreement. The Buyer shall have performed and
complied in all material respects with all its obligations under this Agreement
which are to be performed or complied with by it prior to or at the Closing.
8.2. DeGas Waiver. Either Seller shall have received from DeGas a
waiver of DeGas's preferential right to purchase the Assets, or DeGas's sixty
(60) day period in which to evoke its Right to First Refusal shall have expired.
ARTICLE IX - CLOSING; TERMINATION; POST CLOSING
9. Closing.
9.1. Place. The Closing shall take place at such location as mutually
agreed upon by the Buyer and the Seller. Closing may be by facsimile transaction
or in Escrow.
9.2. Termination. At any time before the Closing, this Agreement may be
terminated: (i) by mutual consent of the parties; (ii) by either the Buyer or
the Seller if there has been a material misrepresentation, material breach of
warranty or material breach of covenant by the other; (iii) by the Buyer if any
condition set forth in Article VII shall not be satisfied at the Closing; or
(iv) by the Seller if any condition set forth in Article VIII shall not be
satisfied at the Closing.
9.3. Transfer of Assets. Seller will, subject to the provisions of this
Agreement: (i) execute and deliver to Buyer an Assignment satisfying the
requirements
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of Paragraph 2.3; and (ii) transfer to Buyer all of Seller's right, title and
interest in and to any funds received by Seller after the Effective Date.
9.4. Taxes. All Taxes shall be pro-rated between Seller and Buyer as of
the Effective Date. Seller shall be charged for all such Taxes based on
ownership of the Assets prior to the Effective Date. Buyer shall be charged for
all such Taxes based on ownership of the Assets from and after the Effective
Date. Buyer shall pay all documentary, filing and recording fees for the
Assignments required in connection with the transaction contemplated by this
Agreement.
9.5. Purchase Price Allocation. Seller and Buyer recognize that
reporting requirements of Sec. 1060(b) of the Internal Revenue Code, and the
regulations promulgated thereunder, may apply to the transaction contemplated by
this Agreement. If so, Seller and Buyer agree that the Purchase Price shall be
allocated among the assets as mutually agreed by Seller and Buyer to comply with
and satisfy the requirements of Sec. 1060(b) and applicable regulation. Seller
and Buyer agree that no Asset shall be allocated a negative value. The allocated
value of the Assets is set forth on Schedule 9.5.
9.6. Payment. Buyer shall pay to Seller the Purchase Price pursuant to
Article III.
9.7. Accounts Receivable and Accounts Payable. All unpaid accounts
receivable and unpaid accounts payable as of the Closing Date shall be handled
in accordance with Paragraphs 3.1 and 3.2 above.
9.8. Final Settlement Statement. Within sixty (60) days after the
Closing, or as soon as practical thereafter, Buyer shall prepare, in accordance
with this Agreement, the Final Settlement Statement, setting forth any
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appropriate adjustments or payments not finally determined as of the Closing
Date. Buyer shall submit the Final Settlement Statement to Seller and shall
afford Seller access to Buyer's records pertaining to the computation of the
Final Settlement Statement. Seller shall deliver to Buyer a written report
containing any changes, which Seller proposed, be made to the Final Settlement
Statement. The parties shall employ that degree of effort as would prudent
business persons engaged in on going business relationships to reach agreement
as to the amounts due pursuant to such Final Settlement statement no later than
thirty (30) days after the submission of the Final Settlement Statement to
Seller. The date upon which such agreement is reached shall be called the
"Settlement Date".
9.8.1. On the Settlement Date, should one party be obligated to
the other by reason of the Final Settlement Statement, the indebted party shall
pay to the other party, in immediately available funds, those monies determined
to be due under the Final Settlement Statement. Until paid, all past due amounts
under this Paragraph 9.8 shall bear interest at the rate of prime plus two
percent, to more, as established by PNC Bank, Pittsburgh, Pennsylvania
(computed based on a 360 day year).
ARTICLE X - INDEMNIFICATION
10.1. Indemnification of the Buyer. DRI and DCP shall indemnify and
hold the Buyer harmless against., and reimburse the Buyer on demand for., all
actual damage, loss, cost or expense (including reasonable attorneys' fees
incurred in defending or settling any claim for such damage, loss, cost or
expense) incurred by the Buyer resulting from any breach of DRI's and DCP's
representations, warranties or covenants in this Agreement, including, but not
by way of limitation, claims arising
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out of DRI's management of DCP and the distribution of proceeds here from
between DRI and the limited partners of DCP.
10.2. Indemnification of the Seller. The Buyer shall indemnify and hold
DRI and DCP harmless against, and reimburse DRI and DCP on demand for, all
actual damage, loss, cost or expense (including reasonable attorneys' fees
incurred in defending or settling any claim for such damage, loss, cost or
expense) incurred by the Seller resulting from any breach of the Buyer's
representations, warranties or covenants in this Agreement.
ARTICLE XI - MISCELLANEOUS
11.1. Notices. Any notice, request demand, statement or other
communication required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered in person, or if telegraphed, or
by courier, or mailed by certified mail, return receipt requested, when actually
received, and may be given as follows:
If to Seller:
Deven Resources, Inc.
983 Old Eagle School Road, Suite 615
Wayne, Pennsylvania 19087
Attention: Gary J. Novinskie
with copies to:
Ehmann, Van Denbergh & Trainor, PC
Two Penn Center Plaza, Suite 725
Philadelphia, Pennsylvania 19102-1707
Attention: C. Warren Trainor, Esquire
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If to Buyer:
Castle Exploration Company, Inc.
531 Plymouth Road, Suite 525
Plymouth Meeting, Pennsylvania 19402
Attention: Richard E. Staedtler
with copies to:
Castle Exploration Company, Inc.
5623 North Western
Oklahoma City, OK 73118
Attention: William C. Liedtke, III, Esq.
Or to such other address as such party may designate by ten (10) days advance
written notice to the other party.
11.2. Exclusiveness. This Agreement embodies all of the
representations, warranties and agreements of the parties hereto with respect to
the subject matter hereof, and all prior understandings, representations and
warranties (whether oral or written) with respect to such matters are
superseded. This Agreement may not be amended, modified, waived, discharged or
terminated except by an instrument in writing signed by the party or an
executive officer of a corporate party against whom enforcement of the change,
waiver, discharge or termination is sought.
11.3. Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provisions were omitted.
11.4. Successors. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns.
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11.5. Assignment. This Agreement may not be assigned without the prior
written consent of the other party.
11.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same agreement.
11.7. Neither Party Drafter. The parties hereto agree that this
Agreement is the product of negotiation between the parties that counsel during
its negotiations has represented each and that neither party shall be deemed the
drafter hereof.
11.8. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the Commonwealth of Pennsylvania
without giving effect to conflicts of laws provisions without giving effect to
conflict of laws provisions.
11.9. Paragraph Headings. The paragraph headings in this Agreement are
for convenience of reference only and shall not be deemed to alter or affect any
provision hereof.
11.10. Costs. Each party agrees to bear its legal, accounting and other
fees incurred in the negotiation of the transaction contemplated hereby, the
conduct of its due diligence and the preparation of the documents addressed
herein.
11.11. Survival of Provisions. The representations and warranties and
covenants of Seller and Buyer set forth in this Agreement and in any instrument
delivered in connection herewith shall survive the Closing, provided that
neither Seller or Buyer nor any successor to Seller or Buyer may bring any
action or present a claim for a breach of such representations and warranties
unless written notice of such
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claim with reasonable particulars of the claim has been delivered to Seller or
Buyer within one (1) year after the Closing Date.
11.12. Exhibits. The Exhibits and Schedules attached hereto, together
with all documents incorporated by reference therein, form an integral part of
this Agreement and are hereby incorporated into this Agreement wherever
reference is made to them to the same extent as if they were set out in full at
the point at which such reference is made.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Execution Date but effective as of the Effective Date.
Attest: CASTLE EXPLORATION COMPANY, INC.
/s/ Susan Pyle /s/ Joseph L. Castle II
- -------------------------------- -----------------------------------------
Secretary By: Joseph L. Castle II
-------------------------------------
Its:CEO
-------------------------------------
Attest: DEVEN RESOURCES, INC.
/s/ Gary J. Novinskie By: /s/ David F. Lincoln
- -------------------------------- -------------------------------------
Secretary David F. Lincoln, President
Attest: DEERLICK CREEK PARTNERS, I, L.P.
By Deven Resources, Inc.,
Managing General Partner
/s/ Gary J. Novinskie By: /s/ David F. Lincoln
- -------------------------------- -------------------------------------
Secretary David F. Lincoln, President
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") dated as of the
15th day of December, 1999, is between WHITING PARK PRODUCTION PARTNERSHIP,
LTD., a Texas limited partnership ("Seller"), whose address is 1700 Broadway,
Suite 2300, Denver, Colorado 80290 and CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation ("Buyer"), whose address is One Radnor Corporate
Center, Suite 250, 100 Matsonford Road, Radnor, Pennsylvania 19087. Seller and
Buyer are referred to herein individually as a "Party" and collectively as the
"Parties."
In consideration of the mutual promises contained herein, the benefits
to be derived by each Party hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller
agree as follows:
ARTICLE 1
PURCHASE AND SALE
1.1 Purchase and Sale. Subject to the terms and conditions of this
Agreement, Seller agrees to sell and convey and Buyer agrees to purchase and pay
for all of Seller's right, title and interest in and to the Interests.
1.2 Interests. All of the following shall be referred to in this
Agreement collectively as the "Interests" and individually as an "Interest":
(a) The oil, gas and mineral leases described on Exhibit "A"
attached hereto (collectively, the "Leases"), including, without limitation,
working interests, overriding royalty interests, royalty interests and any other
interests of a similar nature affecting the lands covered by the Leases
(collectively, the "Lands").
(b) The oil and gas wells described on Exhibit "A" (individually, a
"Well," and collectively, the "Wells"), together with all oil, natural gas,
casinghead gas, drip gasoline, natural gas liquids, condensate and other
minerals produced from such Wells.
(c) All unitization, communitization, pooling, agreements, working
interest units created by operating agreements, partnership agreements and
orders covering the Leases and Lands, or any portion thereof, and the units and
pooled or communitized areas created thereby (collectively, the "Units").
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<PAGE>
(d) The tangible personal property, tools, machinery,
materials, pipelines, plants, gathering systems, equipment, platforms and
facilities, fixtures and improvements, which are incident or attributable to or
underlie the Leases, Lands, Wells or Units or with the production, treatment,
sale or disposal of hydrocarbons or water produced therefrom or attributable
thereto, (collectively, the "Equipment").
(e) The licenses, permits, contracts, agreements and other
instruments owned by Seller (other than bonds posted by Seller) which concern
and relate to any of the Leases, Lands, Wells, Units and/or Equipment, INSOFAR
AND ONLY INSOFAR as same concern or relate to the Leases, Lands, Wells, Units
and/or Equipment, or the operation thereof; including, without limitation, oil,
gas and condensate purchase and sale contracts; permits; rights-of-way;
easements; licenses; servitudes; estates; surface leases; farmin and farmout
agreements; division orders and transfer orders; bottomhole agreements; dry hole
agreements; area-of-mutual interest agreements; salt water disposal agreements;
acreage contribution agreements; operating agreements; balancing agreements and
unit agreements; pooling agreements; pooling orders; communitization agreements;
processing, gathering, compression and transportation agreements; facilities or
equipment leases relating thereto or used or held for use in connection with the
ownership or operation thereof or with the production, treatment, sale or
disposal of hydrocarbons; and all other contracts and agreements related to the
Leases, Lands, Wells and/or Equipment.
(f) Subject to Section 1.3 below, originals or copies of all
computer tapes and discs, files, records, information or data relating to the
Interests in the possession of Seller, including, without limitation, title
records (including abstracts of title, title opinions, certificate of title and
title curative documents), accounting records and files, contracts,
correspondence, production records, electric logs, core data, pressure data,
decline curves, graphical production curves, drilling reports, well completion
reports, drill stem test charts and reports, regulatory reports, and all related
materials, INSOFAR AND ONLY INSOFAR as the foregoing items constitute materials
that may be lawfully conveyed to Buyer (i.e., the materials are not subject to a
proprietary agreement precluding their transfer to Buyer), and, to the extent
transferable, all other contract rights, intangible rights (excluding Seller's
trademarks and service marks), inchoate rights, choses in action, rights under
warranties made by prior owners, manufacturers, vendors or other third parties,
and rights accruing under applicable statutes of limitation or prescription,
attributable to the Interests.
(g) All payments, and all rights to receive payments, with
respect to the ownership of the production of hydrocarbons from or the conduct
of operations on the Interests accruing after the Effective Time.
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1.3 Reserved Interests. Notwithstanding any provision of this Agreement
to the contrary, Seller reserves and retains (i) Seller's corporate, financial,
tax and legal records and its other business records; (ii) cash, bank accounts,
letters of credit, travel letter accounts and prepaid insurance; (iii) the
management information systems and other intellectual property rights of Seller
used by Seller in the management and administration of its business; (iv) all
claims that Seller may have under any policy of insurance, indemnity or bond
maintained by Seller other than claims relating to property damage or casualty
loss affecting the Interests occurring between the Effective Time and Closing
(which claims shall be included in the Interests); (v) all accounts receivable,
trade credits or notes receivable accrued before the Effective Time; (vi) any
files or records that Seller is contractually or otherwise obligated not to
disclose to Buyer; (vii) all claims and causes of action arising from acts,
omissions or events, or damage or destruction of property occurring prior to the
Effective Time; (viii) engineering studies or reserve reports relating to the
Interests; (ix) all interests and rights not included in the definition of the
Interests (the "Reserved Interests").
1.4 Effective Time. The purchase and sale of the Interests shall be
effective as of July 1, 1999, at 7:00 a.m., local time (herein called the
"Effective Time").
1.5 Ownership of the Interests. Subject to Section 13.1 and the other
provisions of this Agreement, should Closing occur, Seller shall be entitled to
all of the rights of ownership (including, without limitation, the right to all
production, proceeds of production and other proceeds), and shall be subject to
the duties and obligations of such ownership attributable to the Interests for
the period of time prior to the Effective Time and Buyer shall be entitled to
all of the rights of ownership (including, without limitation, the right to all
production, proceeds of production and other proceeds) and shall be subject to
the duties and obligation of such ownership attributable to the Interests for
the period of time from and after the Effective Time. All expenses and costs,
including, without limitation, all ad valorem, property, production, severance,
and similar taxes and assessments based upon or measured by the ownership of the
Interests, the production of hydrocarbons, or the receipt of proceeds therefrom)
attributable to the Interests, shall be: (i) paid by or allocated to Seller if
incurred or accruing with respect to operations conducted prior to the Effective
Time; or (ii) paid by or allocated to Buyer if incurred or accruing with respect
to operations conducted after the Effective Time. All hydrocarbons in storage
facilities above or upstream from the pipeline connection to each storage
facility, or downstream of delivery point sales meters on gas pipelines, as of
the Effective Time, shall belong to Seller. All of the hydrocarbons placed in
such storage facilities or upstream of the aforesaid meters on pipelines after
the Effective Time shall belong to Buyer and shall become a part of the
Interests. In order to accomplish the foregoing allocation of production, the
parties shall rely upon the records maintained by the operator of the relevant
Interest, unless such records are demonstrated to be inaccurate.
1.6 Risk of Loss. Buyer shall assume all risk of loss with respect to
the Interests from and after the Effective Time to Closing.
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ARTICLE 2
PURCHASE PRICE
2.1 Purchase Price. The purchase price for the Interests shall be One
Million Two Hundred Fifty-Three Thousand Dollars ($1,253,000), herein called the
"Purchase Price." At Closing, the Purchase Price shall be adjusted as set forth
in Section 2.2 below.
2.2 Earnest Money Deposit. Following its execution of this Agreement,
Buyer shall deposit with Seller, by wire transfer or other immediately available
funds, 10% of the Purchase Price or One Hundred Twenty-Five Thousand Three
Hundred Dollars ($125,300) as an earnest money deposit (the "Earnest Money
Deposit") to assure Buyer's performance of its obligations under this Agreement.
If Closing occurs, the Earnest Money Deposit will be applied to the Adjusted
Purchase Price. If Closing fails to occur, the Earnest Money Deposit shall be
handled in accordance with Section 12.2 hereof.
2.3 Adjustments to Purchase Price. At Closing, the Purchase Price shall
be adjusted as follows and the resulting amount shall be referred to herein as
the "Adjusted Purchase Price":
(a) The Purchase Price shall be adjusted upward by the following:
i. The amount of all actual operating or capital
expenditures or prepaid expenses attributable to the Interests
incurred by or on behalf of Seller in connection with the operation
of the Interests and which are, according to generally accepted
accounting principles, attributable to the period of time between
the Effective Time and the Closing Date. Such expenditures and
expenses shall include, without limitation, royalties, rentals and
other charges; ad valorem, property, excise, and any other taxes
based upon or measured by the ownership of the Interests, the
production of hydrocarbons or the receipt of proceeds therefrom;
and expenses payable to a third person under applicable joint
operating agreements, including, without limitation, overhead
charges at normal company overhead labor rates of approximately
$5,000 per month and royalty disbursement fees payable to operator,
or similar payments to third party operators, or, in the absence of
any joint operating agreement, those items customarily billed under
such an agreement.
ii. The value, less taxes (other than taxes on net income), of
all hydrocarbons in storage facilities above or upstream from the
pipeline connection in each storage facility, or downstream of
delivery point, sales meters on gas pipelines, as of the Effective
Time, at the prevailing market value at the time of sale in the
area, adjusted for grade and gravity.
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iii. Any other amounts agreed upon by Seller and
Buyer.
(b) The Purchase Price shall be adjusted downward by the
following:
i. The Earned Money Deposit;
ii. Reductions due to Title Failures as provided
in Sections 10.7.
iii. For uncured Title Defects and Contested
Defects pursuant to Section 10.8
iv. Reductions due to Environmental Defects as
provided in Section 11.3.
v. The gross proceeds earned by Seller, net of
applicable severance and production taxes
and compression charges, and derived from
the sale of hydrocarbons attributable to the
Interests to the extent owned by Buyer
between the Effective Time and the Closing
Date, pursuant to the provisions of Section
1.5 above.
vi. An amount equal to all unpaid ad valorem,
property, production, severance and similar
taxes and assessments (but not including
income taxes) based upon or measured by the
ownership of the Interests, the production
of hydrocarbons, or the receipt of proceeds
therefrom, which taxes or assessments become
due and payable or accrue (but have not yet
become due and payable) with respect to the
Interests prior to the Effective Time, which
amount shall, where possible, be computed
based upon the tax rate and values
applicable to the tax period in question;
otherwise, the amount of the adjustment
under this paragraph shall be computed based
upon such taxes assessed against the
applicable portion of the Interests for the
immediately preceding tax period just ended.
vii. Any other amounts agreed upon by Seller and
Buyer.
(c) Seller shall pay all capital expenditures and
expenses accruing prior to the Closing Date
referenced in Section 2.3(a)(i) above and shall
collect and receive all proceeds accruing prior to
the Closing Date referenced in Section 2.3(b)(v)
above. Seller shall be responsible for accounting for
all revenues earned and expenses incurred through
December 31, 1999.
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2.4 Purchase Price Allocation. The Purchase Price shall be allocated
among the Interests as set forth in Exhibit "B" attached hereto (the "Allocated
Values").
2.5 Preliminary Settlement Statement. Seller shall prepare and deliver
to Buyer at least five (5) "Business Days" (which term shall mean any day except
a Saturday, Sunday or other day on which commercial banks in Denver, Colorado
are required or authorized by law to be closed) prior to the Closing Date,
Seller's estimate of the Adjusted Purchase Price to be paid at Closing, together
with a statement setting forth Seller's estimate of the amount of each
adjustment to the Purchase Price to be made pursuant to Section 2.2 (the
"Preliminary Settlement Statement"). 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
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
estimation of any disputed amounts, which estimate shall be subject to
adjustment in the Final Settlement Statement pursuant to Section 9.1.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Seller. Seller represents and
warrants to Buyer the following:
(a) Seller is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Texas. Seller is
duly qualified to carry on its business in the State or States in which the
Interests are located and in each State where failure to so qualify would have a
material adverse effect upon its business or the Interests.
(b) Seller has all requisite power and authority to carry on its
business as presently conducted and to enter into this Agreement and to perform
its obligations hereunder.
(c) The execution, delivery and performance of this Agreement and
the transactions contemplated herein have been duly and validly authorized.
(d) This Agreement has been duly executed and delivered on behalf
of Seller, and all documents and instruments required hereunder to be executed
and delivered by Seller at or prior to Closing shall have been duly executed and
delivered. This Agreement does, and such documents and instruments shall,
constitute legal, valid and binding obligations of Seller enforceable in
accordance with their terms.
(e) Seller has incurred no liability, contingent or otherwise, for
broker's or finder's fees or commissions relating to the transactions
contemplated by this Agreement for which Buyer shall have any responsibility
whatsoever.
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(f) There are no outstanding authorizations for expenditures
("AFEs") that (i) require the drilling of wells or other material development
operations in order to earn or to continue to hold all or any portion of the
Interests, or (ii) obligate Seller to make payments of any amounts in connection
with drilling of wells or other material capital expenditures affecting the
Interests.
(g) Seller is not obligated to deliver hydrocarbons produced
from the Interests at some future time without then or thereafter receiving full
payment for the production attributable to Seller's ownership in and to the
Interests by virtue of: (i) a prepayment arrangement under any contract for the
sale of hydrocarbons and containing a "take or pay," or similar provisions, (ii)
a production payment, or (iii) any other arrangement.
(h) Except for those taxes and assessments for which a
Purchase Price adjustment is made under Section 2.3(b)(v), during the period of
Seller's ownership of the Interests, Seller has properly paid all ad valorem,
property, production, severance, excise and similar taxes and assessments based
on or measured by the ownership of property or the production of hydrocarbons or
the receipt of proceeds therefrom on the Interests that have become due and
payable before the Effective Time.
(i) No suit, action, claim, or other proceeding is pending or,
to the best of Seller's knowledge, threatened before any court, arbitration
panel or governmental agency which relates to the Interests and which might
result in a material loss of Seller's title to any portion of the Interests, or
a material diminution of the value of any of the Interests, or that might
materially hinder or impede the operation of the Leases.
(j) As used in this Agreement, the term, "Existing Documents"
shall mean all of the oil, gas and other mineral leases, assignments or other
instruments or agreements that comprise the Interests, and all contractually
binding arrangements to which the Interests may be subject and which will be
binding on the Interests or Buyer after Closing (including, without limitation,
oil, gas and other mineral leases, overriding royalty assignments, farm-out and
farm- in agreements, option agreements, forced pooling orders, assignments of
production payments, partnership agreements, unit agreements, unit operating
agreements, joint operating agreements, balancing agreements, unit operating
agreements, production contracts, processing contracts, gas sales contracts,
marketing and transportation contracts and division orders). To the best of
Seller's knowledge, (i) all Existing Documents are in full force and effect and
are the valid and legally binding obligations of the parties thereto and are
enforceable in accordance with their respective terms (subject to the effects of
bankruptcy, insolvency, reorganization, moratorium and similar laws); (ii)
Seller is not in material breach or default with respect to any of its
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obligations pursuant to any such Existing Documents; and (iii) all payments
(including, without limitation, royalties, delay rentals, shut-in royalties and
valid calls under unit or operating agreements) due thereunder have been timely
paid and Seller has received no notice of default under any of the Existing
Documents.
(k) To the best of Seller's knowledge, all of the Equipment
Seller operates has been maintained in a state of repair so as to be adequate
for normal operations.
(l) To the best of Seller's knowledge, all of the Wells that
have been drilled and completed have been so drilled and completed within the
boundaries and limits permitted by contract, pooling or unit agreement, and by
law; and all drilling, completion, and other operations on or affecting the
Leases have been conducted in compliance with all applicable laws, ordinances,
rules, regulations and permits, and judgments, orders and decrees of any court
or governmental body or agency. No Well is subject to penalties or allowables
after the date hereof because of any over-production or any other violation of
applicable laws, rules, regulations or permits or judgments, orders of decrees
of any court or governmental body or agency.
(m) Except as set forth on Exhibit "C" attached hereto:
(i) Seller's operations and activities with
respect to the Interests comply in all
respects with all applicable governmental
laws, including, without limitation, health
and safety statutes and regulations and all
Environmental Laws, including any provisions
requiring notice to government agencies
under Environmental Laws.
(ii) There is no civil, criminal or
administrative action, suit, demand, claim,
hearing, notice of violation, investigation,
proceeding, notice or demand letter
("Environmental Proceeding") known to Seller
pending or, to the best of Seller's
knowledge, threatened against Seller or any
of the Interests relating in any way to the
Environmental Laws.
(iii) Neither Seller nor, to the best of Seller's
knowledge, any other person has released,
placed, stored, buried or dumped any
Hazardous Substances, Oil, Pollutants or
Contaminants or any other wastes on,
beneath, or adjacent to the Leases, except
for inventories of such substances to be
used in the ordinary course of business of
Seller (which inventories and wastes, if
any, were and are stored or disposed of in
accordance with applicable laws and
regulations).
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(iv) To the best of Seller's knowledge, Seller
has not received any notice or order from
any governmental or other public agency
advising it that Seller is responsible for
or potentially responsible for Cleanup or
paying for the cost of Cleanup of any
Hazardous Substances, Oils, Pollutants, or
Contaminants or any other waste or substance
affecting the Interests. Seller is not aware
of any facts which might reasonably give
rise to any such notice or order.
(v) The term "Cleanup" shall mean all actions
required to: (1) cleanup, remove, treat or
remediate Hazardous Substances, Oils,
Pollutants or Contaminants; (2) prevent the
Release of Hazardous Substances, Oils,
Pollutants or Contaminants so that they do
not migrate, endanger or threaten to
endanger public health or welfare or the
environment; (3) perform pre-remedial
studies and investigations and post-remedial
monitoring and care; or (4) respond to any
government requests for information or
documents in any way relating to cleanup,
removal, treatment or remediation or
potential cleanup, removal, treatment or
remediation of Hazardous Substances, Oils,
Pollutants or Contaminants in the indoor or
outdoor environment.
(vi) The term "Environmental Laws" shall mean all
foreign, Federal, state and local laws,
regulations, rules and ordinances relating
to polluting or protection of the
environment, including, without limitation,
laws relating to Releases or threatened
Releases of Hazardous Substances, Oil,
Pollutants or Contaminants into the indoor
or outdoor environment (including, without
limitation, ambient air, surface water,
groundwater, land, surface and subsurface
strata) or otherwise relating to the
manufacture, processing, distribution, use,
treatment, storage, Release, transport or
handling of Hazardous Substances, Oil,
Pollutants or Contaminants, and all laws and
regulations with regard to record keeping,
notification, disclosure and reporting
requirements respecting Hazardous
Substances, Oils, Pollutants or
Contaminants.
(vii) The term "Hazardous Substances, Oils,
Pollutants or Contaminants" shall mean all
substances defined as such in the National
Oil and Hazardous Substances Pollution
Contingency Plan, or defined as such by, or
regulated as such under, any Environmental
Law.
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(viii) The term "Release" or "Releases" means any
release, spill, emission, discharge,
leaking, pumping, injection, deposit,
disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor
environmental (including, without
limitation, ambient air, surface water,
groundwater, and surface or subsurface
strata) or into or out of any property,
including the movement of Hazardous
Substances, Oils, Pollutants or Contaminants
through or in the air, soil, surface water,
groundwater or property.
3.2 Representations and Warranties of Buyer. Buyer represents and
warrants to Seller the following:
(a) Buyer is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Pennsylvania. Buyer is or
will be prior to Closing duly qualified to conduct business in the State or
States in which the Interests are located.
(b) Buyer has all requisite power and authority to carry on
its business as presently conducted, to enter into this Agreement, and to
purchase the Interests on the terms described in this Agreement and perform its
other obligations under this Agreement.
(c) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly and validly authorized.
(d) This Agreement has been duly executed and delivered by or
on behalf of Buyer; all documents and instruments required hereunder to be
executed and delivered by Buyer at or prior to Closing shall have been duly
executed and delivered; and this Agreement does, and such documents and
instruments shall, constitute legal, valid and binding obligations of Buyer
enforceable in accordance with their terms.
(e) Buyer has incurred no liability, contingent or otherwise,
for broker's or finder's fees or commissions relating to the transactions
contemplated by this Agreement for which Seller shall have any responsibility
whatsoever.
(f) Prior to Closing, Buyer will have inspected the Interests,
the public records and Seller's files for all purposes, including, but not
limited to, detecting the presence and concentration of naturally-occurring
radioactive materials and satisfying itself as to the physical condition and
environmental condition of the Interests, both surface and subsurface. In
entering into this Agreement, Buyer has relied solely on the express
representations and covenants of Seller in this Agreement, its independent
investigation of, and judgment with respect to, the Interests and the advice of
its own legal, tax, economic, environmental, engineering, geological and
geophysical advisors, and not on any comments or statements of any
representatives of, or consultants or advisors engaged by Seller.
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(g) At Closing, Buyer will meet the bonding and other
requirements required by all governmental authorities in respect to the
Interests (and Seller agrees to provide Buyer, prior to Closing, with a list of
such requirements) and, after Closing, Buyer anticipates that it will continue
to be able to meet such bonding requirements. Buyer is, and after the Closing is
expected to continue to be, otherwise qualified to own the Interests. The
consummation of the transactions contemplated hereby will not cause Buyer to be
disqualified to be an owner of oil, gas, and mineral leases or to exceed any
acreage limitation imposed by law, statute, rule or regulation. Buyer is not
aware of any fact that could reasonably be expected to cause the appropriate
governmental authorities to fail to unconditionally approve the assignment of
the Interests to Buyer. Seller will cooperate and will assist Buyer relating to
the preparation and presentation of documents relating to changes in ownership
and/or operatorship of the Interests.
(h) Buyer is an experienced and knowledgeable investor and
operator in the oil and gas business. Buyer is acquiring the Interests for its
own account and not with a view to, or for offer of resale in connection with, a
distribution thereof, within the meaning of the Securities Act of 1933, as
amended, or any other rules, regulations, and laws pertaining to the
distribution of securities.
(i) Buyer has arranged or will have arranged to have available
by the Closing Date sufficient funds to enable the payment to Seller, by wire
transfer, of the Adjusted Purchase Price in accordance with Section 2.3 and to
otherwise perform Buyer's obligations under this Agreement.
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ARTICLE 4
CERTAIN AGREEMENTS OF SELLER
4.1 Agreements Between Execution of Agreement and Closing. During the
period between the execution of this Agreement and the Closing Date, Seller
shall not, without the prior written consent of Buyer, (i) sell, convey, assign,
transfer or encumber any of the Interests; (ii) make or agree to make any
expenditure in excess of $25,000.00, net to Seller's interest, except for
obligations under existing contracts, expenditures necessary to maintain the
Interests, or in the event of any emergency as to which Seller has notified
Buyer; (iii) sell oil, gas or other minerals from the Interests except sales
made in the ordinary course of business; (iv) enter into any agreement amending,
modifying or terminating any of the Leases; or (v) take any other action with
respect to any of the Interests that would cause a material diminution in the
value thereof or that would materially and adversely affect the use and
enjoyment thereof.
4.2 Access to Records. Following the execution of this Agreement by the
Parties, Seller shall afford to Buyer and its authorized representatives, during
normal business hours, reasonable access to well and land files, title, contract
and legal materials and operating data and information in Seller's possession or
to which it has access affecting the Interests.
4.3 Notification of Additional Proceedings. Seller shall promptly
notify Buyer of any new suits, actions, claims or other proceedings threatened
or pending before, or required to be filed with, any court, arbitrator or
governmental agency which relate to the Interests.
4.4 Consents. Seller shall use its best efforts to obtain any consents
necessary to transfer the Interests to Buyer.
ARTICLE 5
CERTAIN AGREEMENTS OF BUYER
5.1 Cooperation. Buyer shall cooperate with Seller to assist Seller in
carrying out the agreements of Seller hereunder.
5.2 Letters-of-Credit. Buyer will obtain letters-of-credit to replace
those posted by Seller with respect to the Interests.
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ARTICLE 6
BUYER'S CONDITIONS TO CLOSING
The obligations of Buyer to consummate the transactions provided for
herein are subject, at the option of Buyer, to the fulfillment on or prior to
Closing of each of the following conditions:
6.1 Representations. The representations and warranties by Seller set
forth in Section 3.1 above shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date.
6.2 Changes. There shall have been no material adverse change in the
physical condition of the Interests, except depletion through normal production
within authorized allowable and rates of production, depreciation of equipment
through ordinary wear and tear, and other transactions permitted under this
Agreement or approved in writing by Buyer.
6.3 Performance. Seller shall have timely performed and complied with
all agreements and covenants required by this Agreement.
6.4 No Legal Proceedings. No suit, action or other proceeding shall be
pending or threatened before any court, arbitration panel or governmental agency
seeking to restrain, prohibit or declare illegal, or seeking substantial damages
in connection with the purchase and sale contemplated by this Agreement, or
which might result in a material loss of any portion of the Interests, a
material diminution in the value of any of the Interests, or materially
interfere with the use or enjoyment of the Interests, except (i) matters that
are disclosed on Exhibit "D" or (ii) any suit or proceeding affecting only a
portion of the Interests, which portion could be treated as subject to a Title
Defect in accordance with Article 10.
6.5 Existing Documents. Buyer must be reasonably satisfied with the
terms and conditions of the Existing Documents.
ARTICLE 7
SELLER'S CONDITIONS TO CLOSING
The obligations of Seller to consummate the transactions provided for
herein are subject, at the option of Seller, to the fulfillment on or prior to
Closing of each of the following conditions:
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7.1 Representations. The representations and warranties by Buyer set
forth in Section 3.2 above shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date.
7.2 Performance. Buyer shall have timely performed and complied in all
material respects with all agreements and covenants required by this Agreement.
7.3 No Legal Proceedings. No suit or other proceeding shall be pending
before any court or governmental agency seeking to restrain prohibit or declare
illegal, or seeking substantial damages in connection with, the sale
contemplated by this Agreement, except (i) matters with respect to which Seller
has been adequately indemnified by Buyer or (ii) any suit or other proceeding
affecting only a portion of the Interests, which portion could be treated as
subject to a Title Defect in accordance with Article 10.
7.4 Letters-of-Credit. Buyer will have obtained the letters-of-credit
to referred to in Section 5.2.
ARTICLE 8
CLOSING
8.1 Date of Closing. Subject to the conditions stated in this
Agreement, the purchase and sale of the Interests pursuant to this Agreement
(the "Closing") shall occur on or before December 28, 1999, at 10:00 a.m.,
Mountain Time, or on such other date and time as Buyer and Seller may agree (the
"Closing Date"). Notwithstanding such Closing, Seller shall continue to perform
the accounting services referred to in Section 2.3(c) through December 31, 1999.
8.2 Place of Closing. The Closing shall be held at the offices of
Seller as set forth hereinabove; provided, however, the Parties may agree to
close via facsimile or overnight mail.
8.3 Closing Obligations. At the Closing, the following documents shall
be delivered and the following events shall occur, each event being a condition
precedent to the others and each being deemed to have occurred simultaneously
with the others:
(i) Seller shall execute and deliver: (1) an Assignment,
Bill of Sale and Conveyance in the form attached
hereto as Exhibit "D" (the "Assignment") (in
sufficient counterparts to facilitate recording)
conveying the Interests, subject to the Permitted
Encumbrances; (2) such other instruments as may
be required to convey the Interests to Buyer and
otherwise effectuate the transactions contemplated by
this Agreement.
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(ii) Seller and Buyer shall execute and deliver the
Preliminary Settlement Statement.
(iii) Buyer shall deliver to Seller or to Seller's account
(at such place as may be designated by Seller in a
written notice, such notice to be delivered to Buyer
not less than two (2) Business Days prior to Closing)
by direct bank or wire transfer the Adjusted Purchase
Price.
(iv) Seller shall deliver on forms supplied by Buyer
transfer orders or letters in lieu thereof, directing
the operator or purchaser to make payment of proceeds
attributable to production from the Interests after
the Effective Time to Buyer.
8.4 Records. In addition to the obligations set forth under Sections
4.2 and 8.3 above, within thirty (30) days after Closing, Seller shall deliver
to Buyer all original well and land files in its possession or to which it has
access. Buyer shall be entitled to all original records affecting the Interests
assigned to Buyer pursuant to the terms of this Agreement. Seller shall be
entitled to keep a copy of such records for its files. Buyer agrees to preserve
and maintain such records for at least five (5) years after the Closing Date and
to provide Seller access to such records during normal business hours during
such period.
ARTICLE 9
POST-CLOSING MATTERS
9.1 Final Settlement Statement. As soon as practicable after the
Closing, but in no event later than ninety (90) days after Closing, Seller shall
prepare and deliver to Buyer, in accordance with this Agreement and generally
accepted accounting principles, a statement ("Final Settlement Statement")
setting forth each adjustment (other than adjustments for Title Defects) finally
determined as of Closing and showing the calculation of such adjustments. Within
thirty (30) days after receipt of the Final Settlement Statement, Buyer shall
deliver to Seller a written report containing any changes that Buyer proposes be
made in good faith to resolve any questions with respect to the amounts due
pursuant to such Final Settlement Statement no later than one hundred twenty
(120) days after the Closing.
9.2 Unpaid Third Party Funds. At such time as Buyer and Seller agree on
a Final Settlement Statement, Seller will transfer to Buyer all funds held by
Seller in suspense for a third party owner of royalty, overriding royalty,
working interests, mineral interest or other similar interests, attributable to
the Interests, and will deliver all records in Seller's possession, including a
schedule of such funds listing the owners thereof, which may be useful to
determine proper disbursement. Buyer shall thereafter be responsible for
determining the proper payment of such
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amounts and shall indemnify and hold harmless Seller from and against any and
all cost, loss or expense of whatever kind, including attorneys' fees, arising
from or in connection with the claim or any person, up to the amount listed on
the schedule provided by Seller with respect thereto, with respect to the funds
transferred to Buyer pursuant to this Section 9.2. Seller shall be responsible
for amounts in excess of the amounts listed.
9.3 Further Assurances. After Closing, Seller, and Buyer shall execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered such
instruments and take such other action as may be necessary or advisable to carry
out their obligations under this Agreement and under any Exhibit, document,
certificate or other instrument delivered pursuant hereto.
9.4 Survival. All representations and warranties set forth in this
Agreement in Sections 3.1 (a) - (h) and 3.2 (a) - (e) shall survive the Closing,
but no other representations and warranties shall survive the Closing.
9.5 Substitute of Letters-of Credit. If the beneficiaries of the posted
letters-of-credit referred to in Section 5.2 withhold their consent to accept
the letters-of-credit obtained by Buyer in replacement for such posted
letters-of-credit, Buyer instead will obtain letters-of-credit in favor of
Seller to support such posted letters-of-credit.
ARTICLE 10
TITLE MATTERS
10.1 Access to Title and Other Documents.
(a) After the date hereof, Seller will make available to Buyer
and to its representatives (such representatives to include employees,
consultants, independent contractors, attorneys and other advisors of Buyer) for
Buyer's copying and/or inspection (at Buyer's cost and expense), at Seller's
offices during normal business hours the following documents in Seller's
possession or under its control:
(i) All abstracts of title, title opinions, title
curative materials, ownership reports, division
orders, bills of sale, other documents evidencing
transfers of title, tax receipts, and licenses and
registrations pertaining to the Interests.
(ii) All of the lease records, lease files, leases,
conveyances and assignments of interest in the
Leases; unitization, unit, pooling and operating
agreements; division orders; contracts; transfer
orders; orders of the applicable regulatory
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authorities or administrative agencies; mortgages,
deeds of trust, security agreements, and financing
statements; and all other contracts, agreements and
documents affecting the Interests.
(iii) Instruments and documents concerning proper payment
of all general and special assessments, ad valorem
and property taxes, and production, severance and
similar taxes and assessments based on or measured by
the ownership of the Interests, the production of
hydrocarbons, or the receipt of proceeds therefrom
for 1999 and years prior for which the applicable
statute of limitations has not expired.
(iv) All geological maps, geophysical surveys, ownership
maps, seismic surveys, logs, core studies, and
surveys relating to the Interests.
(v) All production records; transportation agreements;
contracts concerning the purchase of gas, oil,
casinghead gas, distillate, gas condensate or other
hydrocarbons; processing agreements; all
correspondence relating to the Interests; and data
sheets relating to the Interests and to bonuses,
rentals and royalties payable with respect thereto.
(vi) All agreements relating to the purchase, sale,
processing, and transportation of production from
the Wells.
(vii) All bonds, leases, permits, easements, licenses,
orders, saltwater disposal agreements, agreements
with pumpers and other agreements in any way relating
to the Interests or the operation thereof.
Reliance on such information shall be at the sole risk of the Buyer, and Seller
makes no guaranty or representation as to the accuracy or completeness of such
data, except as otherwise provided in this Agreement.
Seller shall authorize Buyer and its representatives to
consult with attorneys, abstract companies and other consultants or independent
contractors of Seller (whether utilized in the past or present) concerning title
related matters. Reliance on such information of such third parties shall be at
the sole risk of the Buyer, and Seller makes no guaranty or representation as to
the accuracy or completeness of such data.
10.2 No Warranty or Representation. At the Closing, Seller shall convey
to Buyer all the Interests. Such conveyance shall be subject to the Permitted
Encumbrances and WITHOUT ANY WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED, AND
WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, except for the warranty of
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title as to persons claiming by, through and under Seller contained in the
Assignment. Without limiting Buyer's right to reduce the Purchase Price in the
manner provided in this Article 10, Seller makes no warranty or representation,
express or implied, with respect to the accuracy or completeness of any
information. Records or data now, heretofore, or hereafter made available to
Buyer in connection with this Agreement, including, without limitation, any
description of the Interests, pricing assumptions, potential for production of
hydrocarbons from the Interests, or any other matters contained in any material
furnished by Seller to Buyer or its officers, directors, employees, agents,
advisors or representatives.
10.3 Disclaimer. ALL PERSONAL PROPERTY, MACHINERY, FIXTURES, EQUIPMENT
AND MATERIALS CONVEYED HEREBY ARE SOLD AND ASSIGNED AND ACCEPTED BY BUYER IN
THEIR "WHERE IS, AS IS" CONDITION, WITHOUT ANY WARRANTIES, EXPRESS OR IMPLIED OR
STATUTORY, OF MARKETABILITY, QUALITY, CONDITION, MERCHANTABILITY AND/OR FITNESS
FOR A PARTICULAR PURPOSE OR USE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED.
10.4 Permitted Encumbrances. As used in this Agreement, the term
"Permitted Encumbrances" shall mean the following, provided that the same shall
not operate to reduce the net revenue interest or increase the gross working
interest of an Interest beyond that shown on Exhibit "A":
(a) Lessors' royalties, non-participating royalties, overriding
royalties, division orders, reversionary interests, and similar burdens.
(b) Preferential rights to purchase and required third party
consents to assignments and similar agreements, with respect to which, prior to
Closing (i) waivers or consents are obtained from the appropriate parties, (ii)
the appropriate time period for asserting such rights has expired without an
exercise of such rights, or (iii) arrangements acceptable to Buyer can be made
by Buyer and Seller to allow Buyer to receive substantially the same economic
benefits as if all such waivers and consents to assign have been obtained.
(c) Liens for taxes or assessments not yet due or delinquent or,
if delinquent, that are being contested in good faith in the normal course of
business.
(d) All rights to consent by, required notices to, filing with, or
other actions by governmental entities in connection with the sale or conveyance
of oil and gas leases or interests therein, if the same are customarily obtained
subsequent to such sale or conveyance and neither Seller nor Buyer has no reason
to believe they cannot be obtained.
(e) Such Title Defects as Buyer may have waived in writing.
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(f) Rights reserved to or vested in any governmental
authority.
(g) Rights of a common owner of any Interest in rights-of-way
or easements currently held by Seller and such common owner as tenants in common
or through common ownership.
(h) Easements, conditions, covenants, restrictions,
servitudes, permits, rights-of-way, surface leases and other rights in the
Interests for the purpose of surface operations, roads, alleys, highways,
railways, pipelines, transmission lines, transportation lines, distribution
lines, power lines, telephone lines, and removal of timber, grazing, logging
operations, canals, ditches, reservoirs and other like purposes, or for the
joint or common use of real estate, rights-of-way, facilities and equipment
which do not materially impair the rights held by Buyer or the use and enjoyment
of the Interests.
(i) Defects, irregularities and deficiencies in title to any
rights-of-way, easements, surface lease or other rights which in the aggregate
do not materially impair the use of such right-of-way, easements, surface leases
or other rights for the purpose of which such rights will be held by Buyer.
(j) Zoning, planning and environmental laws and ordinances and
municipal regulations.
(k) Vendors, carriers, warehousemen, repairmen, mechanics,
workmen, materialmen, construction or other like liens arising by operation of
law in the ordinary course of business or incident to the construction or
improvement of any property in respect of obligations which are not yet due, or
which are being contested in good faith by appropriate proceedings by or on
behalf of Seller.
(l) Liens created under operating agreements in respect of
obligations that are not yet due or that are being contested in good faith by
appropriate proceedings by or on behalf of Seller.
(m) The terms and provisions of the Existing Documents.
10.5 Good and Defensible Title. For the purposes of this Article
10, the term "Good and Defensible Title" shall mean, with respect to each of the
Interests, that title of Seller which, subject to and except for Permitted
Encumbrances:
(a) Entitles Seller, throughout the duration of the relevant
Interest, to receive from such Interest (free and clear of all royalties,
overriding royalties, non-participating royalties, net profits interests, or
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other burdens on or measured by production of hydrocarbons) not less than the
interest shown as the net revenue interest on Exhibit "A" in all hydrocarbons
produced, saved and marketed from the Interest and of all hydrocarbons produced,
saved, and marketed from any unit of which the Interest is a part and which is
allocated to such Interest; all without reduction, suspension, or termination of
the Interest.
(b) Obligates Seller to bear the percentage of the costs and
expenses relating to the maintenance and development of, and operations relating
to, the Interest not greater than the gross working interest shown on Exhibit
"A" without increase throughout the duration of such Interest.
(c) Is free and clear of liens, encumbrances and defects.
(d) All irregularities of title that would not reasonably be
expected to result in claims that would materially and adversely affect Seller's
title to an Interest shall not be considered a Title Defect, including but not
limited to (i) defects in the chain of title consisting of failure to recite
marital status or the omission of succession or heirship proceedings; (ii)
defects or irregularities arising out of prior oil and gas leases which, on
their face, expired more than three (3) years prior to the Effective Time, and
which have not been released of record; (iii) defects or irregularities arising
out of acknowledgments, questions of identity, trusts or trustees, executors and
personal representatives, and the manner in which they executed documents or
were identified thereon; (iv) defects or irregularities arising out of mortgages
or deeds of trust which, by their terms, matured more than six (6) years prior
to the Effective Time but which remain unreleased of record; (v) defects or
irregularities arising out of the lack of survey of specific land or lease
description; (vi) defects or irregularities arising out of the lack of recorded
powers of attorneys from corporations, banks, trusts or personal representatives
to execute and deliver documents on their behalf or on behalf of others; (vii)
defects or irregularities cured by possession under applicable statutes of
limitation and statutes relating to prescription.
10.6 Notice of Title Defect. Except for Permitted Encumbrances, any
defect in title, lien, encumbrance, or defect that would cause Sellers title to
any Interest not to be Good and Defensible Title shall be a title defect ("Title
Defect"). Not later than five (5) days before the Closing Date (the "Warranty
Claim Date"), Buyer must notify Seller in writing of any matter that Buyer
considers to be a Title Defect ("Notice of Title Defect"), which notice shall
include, (i) a specific description of the matter Buyer asserts as a Title
Defect, (ii) a specific description of the Interest or the portion of the
Interest that is affected by the Title Defect, (iii) Buyer's calculation of the
amount ("Title Defect Amount") that the value of the Interest should be reduced
because of the Title Defect based on the Allocated Value shown on Exhibit "B,"
and (iv) appropriate supporting documentation.
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Notwithstanding anything to the contrary in this Agreement, the Buyer
shall be deemed to have waived any Title Defect which the Buyer has not
specifically asserted in its Notice of Title Defect presented before the
Warranty Claim Date.
10.7 Title Failure. Any item that Seller acknowledges is a Title Defect
but that Seller is unwilling to cure shall be deemed a title failure ("Title
Failure") and, subject to Section 10.9 below, the Purchase Price shall be
reduced for such Title Defect pursuant to Section 2.3 unless, in Seller's
reasonable judgment, it is unlikely that material losses, costs, expenses and
liabilities will be experienced with respect to such Title Defect and Seller
agrees to indemnify Buyer with respect thereto.
10.8 Defect Notice; Seller's Opportunity to Cure. To the extent that
Seller disputes that any item described in the Notice of Title Defect actually
constitutes a Title Defect or disputes the Title Defect Amount assigned by Buyer
to any such Title Defect ("Contested Defect"), Seller shall deliver to Buyer a
notice so stating ("Defect Notice"). Subject to the provisions of 10.9 below,
the portion of the Purchase Price attributable to Title Defects which Seller is
willing to cure but which are uncured at Closing, or which are not waived by
Buyer at Closing (including Contested Defects), shall be deposited into an
escrow account pursuant to an escrow agreement agreed to by the Parties and the
Assignment will be revised to delete all of that portion of the Interests
affected by such Title Defects (including Contested Defects). If Seller fails to
cure a Title Defect within ninety (90) days after Closing, it shall be deemed a
Title Failure and the funds attributable to such Title Defect shall be released
from escrow to Buyer.
10.9 Title Purchase Price Adjustments. Notwithstanding any provision
hereof to the contrary, there shall be no reduction in the Purchase Price for
Title Failures and no escrow for Title Defects or Contested Defects unless and
until the aggregate amount of such Title Defects (including Title Failures and
Contested Defects) exceeds four percent (4%) of the Purchase Price and only for
the amount in excess of such amount.
10.10 Termination Amount. Notwithstanding any provision hereof to the
contrary, in the event the aggregate adjustments for Title Defects pursuant to
this Article 10 and for Environmental Defects pursuant to Article 11 amount to
twenty percent (20%) or more of the Adjusted Purchase Price (the "Termination
Amount"), either Party shall have the option to terminate this Agreement,
without any liability, upon written notice to the other Party.
10.11 Preferential Rights and Consents to Assign. Some Interests may be
subject to existing preferential rights to purchase the Interests or consents
may be required in order to assign the Interests. Seller shall provide Buyer
with a list, and shall make a good faith effort to obtain waivers of, any
preferential rights and consents which Seller knows must be obtained prior to
Closing and are not ordinarily obtained after Closing. Buyer shall notify Seller
of any additional consent requirement or preferential right to purchase it
discovers prior to Closing. If a preferential right is exercised prior to
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Closing, the Purchase Price shall be adjusted downward in an amount equal to the
price paid to Seller for the Interest with respect to which the preferential
right has been exercised and such Interest shall be deleted from this Agreement.
In such case Seller shall be entitled to all proceeds paid by the third party
exercising its preferential right to purchase. As to any Interest with respect
to which a required consent to assignment has not been obtained prior to
Closing, Buyer may waive such requirements and accept an assignment covering
such Interest. If Buyer does not waive the requirement, the allocated value of
the Interest so affected shall be deposited into the escrow account referred to
in Section 10.8, with a corresponding adjustment made to the Purchase Price,
until the consent is obtained. If a third party preferential purchase right
burdening any Interest has not been exercised or waived by Closing, Buyer shall
pay for and accept an assignment covering such Interest and, if the preferential
right is exercised after Closing, Buyer shall be entitled to all proceeds paid
for such interest by the third party exercising such preferential purchase
right. Buyer shall be responsible for conveying title to the Interest affected
by said preferential right to the party exercising the same and shall indemnify
and hold Seller harmless from and against any claim or liability for Buyer's
failure to make such conveyance.
ARTICLE 11
ENVIRONMENTAL
11.1 Inspection; Indemnity. Buyer and its authorized representatives,
at Buyer's sole risk and expense, shall have the right to enter upon and inspect
the real and personal properties comprising the Interests, and to conduct such
well, environmental and other tests and assessments as Buyer shall deem
appropriate, subject to the approval of the operator in the case of non-operated
properties. Buyer shall repair any damages to the Interests resulting from its
inspection and shall defend and hold Seller harmless from and against any and
all losses, damages, claims, obligations, liabilities, expenses (including court
costs and attorneys' fees) or causes of action directly resulting from Buyer's
inspection of the Interests.
11.2 Environmental Assessment. As part of its inspection of the
Interests, Buyer and its authorized representatives shall have the right to
conduct soil and water tests and borings, and generally to conduct such tests,
examinations, investigations and studies as may be necessary or appropriate in
Buyer's sole judgment to make an environmental assessment of the Interests.
Buyer shall keep any data or information acquired through such examination and
the results of all analyses of such data and information strictly confidential
and shall not disclose the same to any person or agency without the prior
written approval of Seller unless such disclosure is required by law. Buyer
shall take all steps necessary to ensure that Buyer's authorized representatives
comply with the provisions of this Article 11. If Buyer has discovered in its
environmental assessment circumstances which require remediation, control or
other response under environmental laws, rules or regulations then in effect (an
"Environmental Defect"), Buyer shall notify Seller of such circumstances as soon
as practicable, but in no event less than ten (10) days prior to Closing.
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11.3 Environmental Defects If Buyer properly notifies Seller of an
Environmental Defect related to an Interest, Buyer may (i) waive the
Environmental Defect and Close, or (ii) request Seller to cure the Environmental
Defect. If Buyer asks Seller to cure an Environmental Defect, and if the
aggregate amount of all such Environmental Defects exceeds four percent (4%) of
the Purchase Price, Seller has the option (i) to cure the Environmental Defect,
or (ii) to exclude the Interest affected by the Environmental Defect from this
Agreement. If Seller elects to cure the Environmental Defect, but the cure has
not been completed by Closing, the Interest affected by the Environmental Defect
shall not be conveyed to Buyer at Closing, the Purchase Price shall be reduced
by the amount allocated to such Interest and such amount shall be deposited into
the escrow account referred to in Section 10.7. If the Environmental Defect is
cured within ninety (90) days after Closing, within five (5) days after the
Environmental Defect is cured, Seller will convey to Buyer the Interest affected
by the Environmental Defect and the applicable amount shall be released from
escrow to Seller. If Seller elects to exclude the Interest affected by the
Environmental Defect from this Agreement, subject to Section 11.4 below, the
Purchase Price will be reduced by the allocated value of the Interest affected.
11.4 Environmental Purchase Price Adjustment. Notwithstanding any
provision hereof to the contrary, there shall be no reduction in the Purchase
Price for uncured Environmental Defects unless, and only to the extent that, the
aggregate amount of such uncured Environmental Defects exceeds four percent (4%)
of the Purchase Price and then only for the amount in excess of such amount.
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ARTICLE 12
TERMINATION, DEFAULT AND REMEDIES
12.1 Right of Termination. The Agreement and the transactions
contemplated herein may be terminated at any time at or prior to Closing:
(i) By Seller, at Seller's option, in the event any of the
conditions set forth in Article 7 have not been satisfied as
provided therein.
(ii) By Buyer, at Buyer's option, in the event any of the
conditions set forth in Article 6 have not been satisfied as
provided therein.
(iii) By either Party in the event that the adjustments to the
Purchase Price exceed the Termination Amount, as provided for
in Section 10.10.
(iv) At any time by the mutual written agreement of the Parties.
12.2 Effect of Termination. In the event of the termination of this
Agreement by Seller pursuant to Section 12.1 (i) hereof due to Buyer's failure
to meet a condition of Closing, Seller may terminate this Agreement and retain
the Earnest Money Deposit and any accrued interest thereon as its sole remedy.
In the event Buyer terminates this Agreement pursuant to Section 12.1 (ii)
hereof due to Seller's failure to meet a condition of Closing, Buyer may pursue
its rights and remedies against Seller for Seller's breach of this Agreement and
receive back the Earnest Money Deposit, with accrued interest. In the event of
the termination of this Agreement pursuant to either Section 12.1 (iii) or (iv)
hereof, the termination shall be without penalty and the Parties shall have no
further obligations to, nor rights against, one another, except that Seller
shall return the Earnest Money Deposit to Buyer, with accrued interest.
12.3 Dispute Resolution. If the Parties disagree as to the cause for
termination, they will first attempt to resolve such disagreement through a
meeting, to be held within ten (10) days of such termination, of senior
executives of each party, and if such meeting fails to resolve the matter,
through a neutral arbitrator appointed by such executives within thirty (30)
days of the date of such meeting.
12.4 Return of Documentation. Upon termination of this Agreement, Buyer
shall return to Seller all title, geological data, reports, contracts, and maps
and other information furnished by Seller to Buyer and all copies thereof.
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ARTICLE 13
ASSUMPTION OF OBLIGATIONS
13.1 Assumption of Obligations. At Closing, Buyer shall assume (a) the
obligation to (i) plug and abandon or remove and dispose of all Wells (whether
then producing or temporarily or permanently abandoned), platforms, structures,
flow lines, pipelines, and the other equipment now or hereafter located on the
Interests; (ii) cap and bury all flow lines and (iii) dispose of other pipelines
now or hereafter located on the Interests, and all other pollutants, wastes,
contaminants, or hazardous, extremely hazardous, or toxic materials, substances,
chemicals or wastes now or hereafter located on the Interests; (b) all
obligations and liabilities arising from or in connection with any gas
production, pipeline, storage, processing or other imbalance attributable to
substances produced from the Interests on or after the Effective Time; and (c)
all other costs, obligations and liabilities that relate to the Interests and,
in each case, arise from or relate to events occurring on or after the Effective
Time. All such plugging, replugging, abandonment, removal, disposal, and
restoration operations shall be in compliance with applicable laws and
regulations and contracts, and shall be conducted in a good and workmanlike
manner.
ARTICLE 14
MISCELLANEOUS
14.1 Fees and Taxes. Except as otherwise specifically provided, all
fees, costs and expense incurred by Buyer or Seller in negotiating this
Agreement or in consummating the transactions contemplated by this Agreement
shall be paid by the Party incurring the same, including, without limitation,
legal and accounting fees, costs and expenses. All required documentary, filing
and recording fees for the assignments, conveyance or other instruments required
to convey title to the Interests to Buyer shall be borne by Buyer. In addition,
the liability for any sales, use, transfer or similar tax associated with the
sale and/or transfer of the Interests shall be the liability of, and for the
account of, the Buyer and such liability shall not be subject to proration as
provided in Section 2.3.
14.2 Notices. All notices and communications required or permitted
under this Agreement shall be in writing and shall be deemed to have been duly
made when actually delivered, including delivery by courier, facsimile,
telecopy, or other electronic medium, or if mailed by registered to certified
mail, postage prepaid, addressed as follows:
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SELLER:
WHITING PARK PRODUCTION PARTNERSHIP, LTD.
c/o WHITING PROGRAMS, INC., General Partner
1700 Broadway, Suite 2300
Denver, Colorado 80290
Attn: John R. Hazlett
Vice President-Acquisitions/Land
Telephone: (303) 837-4230
Facsimile: (303) 837-4244
BUYER:
CASTLE EXPLORATION COMPANY, INC.
One Radnor Corporate Center, Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Attn: Richard E. Staedtler
Chief Financial Officer
Telephone: (610) 995-9400
Facsimile: (610) 995-0409
Either Party may, by written notice so delivered to the other, change the
address to which delivery shall thereafter be made.
14.3 Amendments. This Agreement may not be amended except by an
instrument in writing signed by Buyer and Seller.
14.4 Preparation of Agreement. Both Seller and Buyer and their
respective counsel participated in the preparation of this Agreement. In the
event of any ambiguity in this Agreement, no presumption shall arise based on
the identity of the draftsman of this Agreement.
14.5 Headings. The headings of the articles and sections of this
Agreement are for guidance and convenience of reference only and shall not limit
or otherwise affect any of the terms or provisions of this Agreement.
14.6 Counterparts. This Agreement may be executed by Buyer and Seller
in any number of counterparts, each of which shall be deemed an original
instrument, but all of which together shall constitute but one and the same
instrument.
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14.7 References. References made in this Agreement, including use of a
pronoun, shall be deemed to include, where applicable, masculine, feminine,
singular or plural, individuals or corporations. As used in this Agreement,
"person" shall mean any natural person, corporation, partnership, trust, estate
or other entity.
14.8 Governing Law. This Agreement and the transactions contemplated
hereby shall be construed in accordance with, and governed by, the laws of the
State of Colorado without giving effect to the conflicts of law rules thereof.
Any disputes concerning this Agreement or the subject matter hereof shall be
brought in a court of competent jurisdiction of the State of Colorado.
14.9 Entire Agreement. This Agreement (including the Exhibits hereto)
constitutes the entire understanding between the Parties with respect to the
subject matter hereof, superseding all negotiations, prior discussions and prior
agreements and understanding relating to such subject matter.
14.10 Assignment; Parties in Interest. Neither Party shall assign this
Agreement without the other Party's prior written consent; provided, however,
that this requirement shall not apply to a subsidiary or other affiliate of the
assigning Party so long as the assigning Party remains responsible for its
assignee's obligations hereunder. Subject to the foregoing, this Agreement shall
be binding upon, and shall inure to the benefit of, the Parties and their
respective successors and assigns.
14.11 Further Cooperation. After the Closing, Buyer and Seller shall
execute and deliver, or shall caused to be executed and delivered from time to
time, such further instruments of conveyance and transfer and shall take such
other action as any Party may reasonably request to convey and deliver the
Interests to Buyer, to accomplish the orderly transfer of the Interests to
Buyer, or to otherwise effectuate the transactions contemplated by this
Agreement. If either Party hereto receives monies belonging to the other, such
amount shall immediately be paid over to the proper Party. If an invoice or
other evidence of an obligation is received by a Party, which is partially an
obligation of both Seller and Buyer, then the Parties shall consult with each
other and each shall promptly pay its portion of such obligation to the obligee.
14.12. Press Release. Neither Party shall make any press release or
other announcement in connection with the execution of this Agreement or the
Closing without first consulting with the other Party. Following such
consultation and good faith attempt to make reasonable accommodations, either
Party may make any announcement or press release that it believes is either
required by applicable law or the rules of any stock exchange, or is advisable
in connection with such Party's obligation to provide public disclosure
regarding its activities. This provision shall not apply to any filing with any
governmental body or stock exchange required by law, rule or regulation.
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14.13 Subrogation. Buyer shall be subrogated to all rights, actions and
warranties that Seller may have with respect to Seller's
predecessors-in-interest as to the Interests.
EXECUTED as of the date first above stated, but made effective as of
the Effective Time.
SELLER:
WHITING PARK PRODUCTION
PARTNERSHIP, LTD.
By Whiting Programs, Inc., General Partner
By /s/ John R. Hazlett
----------------------------------------
John R. Hazlett, Vice President
BUYER:
CASTLE EXPLORATION COMPANY, INC.
By: /s/ Richard E. Staedler
---------------------------------------
Richard E. Staedler
Chief Financial Officer
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EXHIBIT 10.135
ASSET ACQUISITION AGREEMENT
BETWEEN
CASTLE EXPLORATION COMPANY, INC.
AND
AMERICAN REFINING AND EXPLORATION COMPANY
DEVEN RESOURCES, INC.
CMS/CASTLE DEVELOPMENTAL ENERGY FUND I, L.P.
EFFECTIVE AS OF OCTOBER 1, 1999
<PAGE>
THIS AGREEMENT, dated December 14, 1999 but effective as of
Effective Date, by and among AMERICAN REFINING AND EXPLORATION COMPANY, a
Pennsylvania corporation, whose address is Suite 215, 100 Four Falls Corporate
Center, West Conshohocken, Pennsylvania, 19428 ("AREC"), DEVEN RESOURCES, INC.,
a Pennsylvania corporation whose address is Suite 615, 983 Old Eagle School
Road, Wayne, Pennsylvania 19087 ("DRI") and CMS/CASTLE DEVELOPMENTAL ENERGY FUND
I, L.P., a Delaware partnership with an office at c/o CMS Affiliated
Partnerships, One Bala Plaza, Suite 412, Bala Cynwyd, Pennsylvania 19004("CMS")
(hereinafter AREC, DRI and CMS are sometimes collectively referred to as the
"Sellers" or individually as a "Seller") and CASTLE EXPLORATION COMPANY, INC., a
Pennsylvania corporation, whose address is 61 McMurray Road, Suite 204,
Pittsburgh, Pennsylvania 15241 ("CECI" or "Buyer").
WITNESSETH
WHEREAS, CMS and AREC own undivided working interests in the Assets;
and
WHEREAS, DRI owns a Net Profits Interest in the Assets; and
WHEREAS, Buyer is the previous operator of the Assets, surrendering
operation to AREC on June 17, 1997 and whose parent, Castle Energy Corporation,
owns an undivided working interest in the Assets; and
WHEREAS, the Sellers desire to sell and convey and Buyer desires to
purchase and acquire the Assets, effective as of the Effective Date.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
<PAGE>
ARTICLE I--DEFINITIONS
1. The following terms shall have the meanings ascribed to them below
when used in this Agreement:
1.1. "Agreement", shall mean this Asset Acquisition Agreement.
1.2. "Affiliate", shall mean any Person, more that 50% of which is
owned, owns, or controlled by, directly or indirectly, any party to this
Agreement.
1.3. "Assets", shall mean all of Sellers' interests in:
1.3.1. the Equipment, the Oil and Gas Properties, Pipeline
Interest, Oil and Gas Contracts, Net Profits Interest and the Wells; and
1.3.2. Copies of all documents in Sellers' possession, under
Sellers' control or in the possession of Sellers' agents or representatives,
relating to the Equipment, the Oil and Gas Properties, and the Wells to include,
by way of example and not limitation, Production, financial, and engineering
records, and all other files whether kept manually or on in electronic form,
that covers, deals with or relates to the Assets or any part thereof; provided,
however, that nothing herein shall require Sellers to disgorge their own
geological interpretations, internal corporate, partnership, and legal records,
or management information systems ("Books and Records").
1.4. "Assignment" or "Assignments", shall mean those Assignments
and Bills of Sale in substantially in the form of Exhibit "A" and Exhibit "A-1".
The Assignments shall contain special warranty deed language, conveying the
Assets without warranty, either expressed or implied, except those claiming by,
through or under the Seller, but not otherwise, with full substitution and
subrogation all as more particularly set forth in the Agreement, with all
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Equipment conveyed "AS IS" and "WHEREAS", WITHOUT WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE OR MERCHANTABILITY.
1.5. "Closing", shall mean the consummation of the transactions
contemplated by this Agreement.
1.6. "Closing Date", shall mean the date on which the Closing
shall occur, which date shall in no event be later than December 14, 1999,
unless extended by mutual agreement of the parties hereto.
1.7. "Effective Date", shall mean 7:01 a.m. Eastern Standard Time,
October 1, 1999.
1.8. "Encumbrance", shall mean any mortgage, lien, security
interest, pledge, charge, encumbrance, claim, limitation, reversionary interest,
preferential right to purchase any of the Oil and Gas Properties, irregularity,
burden, hypothecation or defect.
1.9. "Environmental Condition", shall mean any condition of the
soil, subsurface, surface waters, ground waters, atmosphere or other
environmental medium, whether or not yet discovered, which results, or could
reasonably be expected to result, in any damage, loss, cost, expense, claim,
demand, investigation, lien or liability relating to the Assets under any
Environmental Law.
1.10. "Environmental Law ", shall mean the Resource Conservation
and Recovery Act of 1976, as amended, the Clean Air Act, as amended, the Clean
Water Act, as amended, and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, and all federal, state, and other
governmental regulations, orders, interpretations or rulings issued thereunder,
and other Legal Requirements relating to air or water quality, hazardous or
solid wastes, hazardous substances the prevention or remediation of pollution or
environmental damage, protection of the environment or any other environmental
matters.
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1.11. "Equipment", shall mean those items of equipment (i) located
on the Oil and Gas Properties; (ii) appurtenant thereto, and/or, (iii) used in
connection with the Oil and Gas Properties, the Pipeline and/or the Wells.
1.12. "Existing Burdens", shall mean Lease Burdens and Permitted
Encumbrances of record as of the Effective Date or of which Buyer has received
written notice prior to the Closing Date.
1.13. "Final Settlement Statement", shall mean that Final
Settlement Statement as provided for in Paragraph 10.8.
1.14. "Lease Burdens", shall mean all Royalties and Overriding
Royalties and such other rights to share in the Production from the Wells of
record as of the Effective Date, other than the Net Profits Interest.
1.15. "Lease Operating Expenses", shall mean any and all costs and
expenses properly charged by the operator of the Wells pursuant to the
applicable operating agreement governing operations on such Wells.
1.16. "Legal Requirements", shall mean any law, statute,
ordinance, decree, requirement, order, judgment, rule or regulation including by
way of example and not limitation the terms of any license, permit, certificate,
or abandonment approval promulgated, issued or enacted by any governmental
authority to include, without limitation, any bonding requirements of Buyer or
other regulatory approval governing the transfer of operations to Buyer.
1.17. "Net Profits Interest", shall mean that interest in the Net
Profits from the Oil and Gas Properties created by: (a) the Assignment from AREC
to DRI dated May 29, 1997 and recorded in Book 1708, Page 125 of the Records of
Armstrong County, Pennsylvania, as corrected by that Correction of Assignment
dated August 29, 1997 and recorded in Book 1736, Page 171, and that Assignment
from AREC to DRI dated May 29, 1997 and recorded in Book 1911, page 110 of the
Records of Fayette County, Pennsylvania.
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1.18. "Net Revenue Interest", shall mean a Revenue Interest less
all Lease Burdens.
1.19. "Oil and Gas Contracts", shall mean any contracts that
affect or relate to the Oil and Gas Properties or the Production covered thereby
including amendments thereto. "Oil and Gas Contracts" includes, by way of
example and not limitation, area of mutual interest agreements, acreage
contribution agreements, advance payment agreements, bottom hole agreements,
division orders, drilling contracts, dry hole agreements, exploration
agreements, farm-in and farm-out agreements, Gas Balancing Agreements (including
claims to recover natural gas or money under Gas Balancing Agreements for
Seller's under production before the Effective Date), natural gas and oil sales,
exchange, treating and processing contracts, operating agreements, net profits
agreements, participation agreements, storage agreements, support agreements,
transfer orders, transportation agreements, water rights agreements, and salt
water disposal agreements.
1.20. "Oil and Gas Properties", shall mean those oil and gas
leasehold right conveyed to CMS from CECI by: (a) Assignment dated May 21, 1991
and recorded at Book 840, Page 27 in the records of Fayette County, Pennsylvania
on June 1991, as corrected by that Correction of Assignment dated November 24,
1993, but effective as of the date of first production and recorded in Book
1296, Page 275 of the Records of Fayette County, Pennsylvania; (b) Assignment
dated May 21, 1991 and recorded at Book 840, Page 31 of the Records of Fayette
County, Pennsylvania on June 19, 1991, as amended by that Correction of
Assignment dated November 24, 1993, but effective as of the date of first
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production, and recorded in Book 1296, Page 280 of the Records of Fayette
County, Pennsylvania; (c) Assignment dated May 21, 1991 and recorded in Book
840, Page 35 of the Records of Fayette County, Pennsylvania on June 19, 1991, as
corrected by that Correction of Assignment dated November 24, 1993, but
effective as of the date of first production, and recorded in Book 1296, Page
286 of the Records of Fayette County, Pennsylvania; (d) Assignment dated May 21,
1991 and recorded in Book 840, Page 39 of the Records of Fayette County,
Pennsylvania on June 19, 1991, as corrected by that Correction of Assignment
dated November 24, 1993, but effective as of the date of first production, and
recorded in Book 1296, Page 290 of the Records of Fayette County, Pennsylvania;
(e) Assignment dated May 21, 1991 and recorded in Book 840, Page 43 on June 19,
1991, as corrected by that Correction of Assignment dated November 24, 1993 but
effective as of the date of first production and recorded in Book 1296, Page 295
of the Records of Fayette County, Pennsylvania; (f) Assignment dated May 21,
1991 and recorded in Book 840, Page 47 of the Records of Fayette County on June
19, 1991, as corrected by that Correction of Assignment dated November 24, 1993,
but effective as of the date of first production, and recorded in Book 1296,
page 300 of the records of Fayette County, Pennsylvania; (g) Assignment dated
June 13, 1991 and recorded in Book 1116, Page 66 of the Records of Armstrong
County, Pennsylvania on July 5, 1991, as corrected by that Correction of
Assignment dated November 24, 1993, but effective as of the date of first
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production, and recorded in Book 1358, Page 249 of the Records of Armstrong
County, Pennsylvania; (g) Assignment dated May 21, 1991, but effective March 18,
1991, and recorded in Book 1116, Page 54 of the Records of Armstrong County,
Pennsylvania as corrected by that Correction of Assignment dated November 24,
1993, but effective as of March 18, 1991, and Recorded in Book 1358, Page 212 of
the Records of Armstrong County, Pennsylvania; (h) Assignment dated May 21,
1991, but effective as of August 7, 1990 and recorded in Book 1116, Page 46 of
the Records of Armstrong County, Pennsylvania on July 5, 1991, as corrected by
that Correction of Assignment dated November 24, 1993 but effective as of August
7, 1990 and recorded in Book 1358, Page 217 of the Records of Armstrong County,
Pennsylvania; (i) Assignment dated May 21, 1991, but effective as of June 16,
1989, and recorded in Book 1116, Page 62 of the Records of Armstrong County,
Pennsylvania on July 5, 1991, as corrected by that Correction of Assignment
dated November 24, 1993, but effective as of June 16, 1989, and recorded in Book
1358, Page 222 of the Records of Armstrong County, Pennsylvania; (j) Assignment
dated February 12, 1993 but effective as of the date of first production and
recorded in Book 1135, Page 236 of the Records of Armstrong County, Pennsylvania
on March 15, 1993, as corrected by that Correction of Assignment dated November
24, 1993, but effective as of the date of first production, and recorded in Book
1358, Page 228 of the Records of Armstrong County, Pennsylvania; (k) Assignment
dated May 21, 1991 but effective as of March 18, 1991, and recorded in Book 116,
Page 58 of the Records of Armstrong County, Pennsylvania on July 5, 1991, as
corrected by that Correction of Assignment dated November 24, 1993, but
effective as of March 18, 1991, and recorded in Book 1358, Page 234 of the
Records of Armstrong County, Pennsylvania; (l) Assignment dated May 21, 1991,
but effective as of the date of first production, and recorded in Book 1116,
Page 50 of the Records of Armstrong County, Pennsylvania on July 5, 1991, as
corrected by that Correction of Assignment dated November 24, 1993, but
effective as of the date of first production, and recorded in Book 1358, Page
239 of the Records of Armstrong County, Pennsylvania; (m) Assignment dated May
21, 1991, but effective as of April 1989, the date of first production, and
recorded in Book 1116, Page 42 of the Records of Armstrong County, Pennsylvania
on July 5, 1991, as corrected by that Correction of Assignment dated November
24, 1993, but effective as of the date of first production, and recorded in Book
1358, Page 244 of the Records of Armstrong County, Pennsylvania; and (n) any
other real property interest in or under the Wells.
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1.21. "Ordinary Course of Business", shall mean the ordinary
course of business and conduct of operations consistent with past custom and
practice, and shall include, without limitation, operations of a kind and nature
conducted in a manner consistent with those of a reasonably prudent operator in
the same or similar circumstances.
1.22. "Outstanding Obligations", shall mean those Royalties, and
Overriding Royalties accruing on or before the Effective Date and which Seller
has not paid as of the Closing Date, a list of which is set forth on Schedule
1.22.
1.23. "Overriding Royalty", shall mean a non-operating interest
carved out of a Working Interest's share of the oil and gas produced at the
surface, free of production expenses.
1.24. "Permitted Encumbrances", shall mean those Encumbrances as
may exist on the Oil and Gas Properties from time to time in the Ordinary Course
of Business, which are: (a) liens for Taxes not yet due and payable, or if due
and payable, are being contested in good faith in the Ordinary Course of
Business; (b) inchoate, statutory or operators liens securing obligations for
labor, services, materials and supplies furnished to the Oil and Gas Properties,
but only if such liens are not delinquent and will be discharged in the Ordinary
Course of Business; (c) Encumbrances that arise under Oil and Gas Contracts of a
type and nature customary in the oil and gas industry to secure the payment of
amounts that are not yet delinquent or, if delinquent, are being contested in
good faith in the Ordinary Course of Business; (d) Encumbrances that arise as a
result of Oil and Gas Contracts that can be terminated on thirty (30) days
notice, orders and laws.
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1.25. "Person", shall mean an individual, group, partnership,
corporation, trust, Limited Liability Company or other entity.
1.26. "Pipeline", shall mean the gas gathering system located on
the Oil and Gas Properties.
1.27. "Pipeline Interest", shall mean Sellers' interest in the
Pipeline.
1.28. "Production", shall mean all hydrocarbons produced, saved
and sold from the Wells.
1.29. "Revenue Interest", shall mean the gross revenues from
Production attributable to a Working Interest.
1.30. "Royalty", shall mean that proportionate share of Production
payable to the owner of the mineral estate or its designee, free of all expenses
of Production.
1.31. "Taxes", shall mean all ad valorem, severance, and other
taxes or fees levied upon or measured by Production, personal property taxes,
real property taxes, and any and all other taxes or fees of whatever type or
kind assessed or which are based upon the ownership of the Assets.
1.32. "Wells", shall mean Sellers' interest in those wells set
forth on Schedule 1.32 hereto.
1.33. "Working Interest", shall mean an interest in the leases
embodying operating rights, operating obligations (including, but not limited
to, obligations to bear the costs and expenses of exploring for and producing
hydrocarbons) and the right to share in Production.
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ARTICLE II--PURCHASE AND SALE OF THE ASSETS
2.1. Transfer. Subject to the terms of this Agreement, Sellers
hereby agree to sell, transfer, convey and deliver unto the Buyer, and Buyer
hereby agrees to purchase, acquire and accept, the Assets, effective as of the
Effective Date.
2.2. Closing. At the closing, subject to the provisions of Article
X, the Buyer will deliver to Seller the Purchase Price in accordance with
Article III below.
2.3. Closing Date. The date of the Closing shall be December 14,
1999 or such other date as shall be mutually agreeable to the parties.
2.4. Assignments. Subject to the terms and conditions of this
Agreement and in reliance upon the representations and warranties contained
herein, at Closing, Sellers shall convey, transfer, assign and deliver all of
the Assets (by executing and delivering one or more counterparts of the
Assignment, together with a description of the respective Assets attached
thereto) to Buyer. The Assignment shall provide for a Special Warranty of title
to the Assets by, through and under the Sellers, but not otherwise.
ARTICLE III--PURCHASE PRICE
3. Price. The purchase price for the Assets (the "Purchase Price")
shall be Eight Hundred Twenty Six Thousand Three Hundred Sixty Eight Dollars
($826,368.00).
3.1. Manner of Payment. At the Closing, the Buyer will pay to
Sellers' the Purchase Price in immediately available funds. Each of the Sellers
hereby expressly agrees to provide Buyer in writing before the Closing Date with
individual wiring instructions. In the absence of individual wiring instructions
from each Seller, each Seller agrees that the Buyer may wire transfer the
Purchase Price to AREC's account for further distribution to DRI and CMS and,
that Buyer's wire transfer of the Purchase Price to AREC's account shall be
deemed full compliance and satisfaction of the payment terms of this Agreement
as to all Sellers.
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3.2. Allocation of Revenues and Assumption of Liabilities. Subject
to the terms and provisions hereof, as of the Effective Date:
3.2.1. Buyer purchases and acquires the Assets and assumes the
liabilities and obligations pertaining to the Assets which accrue on and after
the Effective Date (to include by way of example and not limitation, all
obligations: (i) under the leases which constitute a portion of the Oil and Gas
Properties; (ii) under the Oil and Gas Contracts; (iii) referenced herein or on
Exhibits hereto; and (iv) other Legal Requirements), as evidenced by the
execution of this Agreement and the execution and acceptance of each Assignment,
but excluding however: (x) liabilities and obligations of Sellers attributable
to Sellers' ownership or operation of the Assets, either incurred or accruing
prior to the Effective Date; or, (y) liabilities or obligations arising from a
breach of any the obligations of Sellers under this Agreement.
3.2.2. Sellers shall retain and bear the liabilities and
obligations attributable to Sellers' ownership or operation of the Assets, (to
include, by way of example and not limitation: (i) costs for leases or leasehold
interests under any existing letter of intent, prospect acquisition agreement,
or other contract or document to which Seller is a party and (ii) all
Outstanding Obligations),and arising and/or incurred prior to the Effective Date
(whether or not actually invoiced or billed prior to or subsequent to the
Effective Date), excluding however: (x) liabilities specifically assumed by the
Buyer under this Agreement; and (y) liabilities arising from a breach of any of
Buyer's obligations under this Agreement.
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3.2.3. Sellers shall receive all proceeds of Production
actually sold and delivered before the Effective Date, and Buyer shall receive
all proceeds of Production actually sold and delivered after the Effective Date.
3.2.4. Seller shall receive all revenues and benefits
attributable to the Assets earned to the period prior to the Effective Date and
Buyer shall receive all revenues and benefits attributable to the Assets earned
on or after the Effective Date. Taxes assessed against the Assets shall be pro
rated at the Closing Date as of the Effective Date.
3.3 Purchase Price Adjustment. At Closing, the Purchase Price
shall be adjusted upwards by the amount of all Lease Operating Expenses actually
paid by Seller for the intervening period between the Effective Date and the
Closing Date, and downwards by: (i) any unpaid Lease Operating Expenses incurred
prior to Effective Date unpaid as of the Closing Date, a list of which will be
provided Buyer prior to the Closing; (ii) any Outstanding Obligations; and (iii)
any adjustments under Article VII below.
ARTICLE IV--THE SELLER'S REPRESENTATIONS AND WARRANTIES
4. The Sellers represent and warrant that:
4.1. Organization. Each of AREC and DRI is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation, CMS is a partnership duly organized and validly existing
under the laws of the State of its formation, and each Seller is in good
standing and qualified to do business in each jurisdiction where it is required
for the conduct of each Sellers' business.
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4.2. Authority. Each Seller has all requisite power and authority
to carry on its business as presently conducted, to enter into this Agreement to
sell the Assets on the terms described in this Agreement, and to perform its
obligations under this Agreement. The consummation of the transaction
contemplated by this Agreement will not violate, nor be in conflict with, any
provisions of its Certificate of Incorporation, Partnership Agreement or other
governing document of any Seller, or any material agreement or instrument to
which a Seller is a party or by which a Seller or any of the Assets is bound, or
any judgment, decree, order, statute, rule or regulation applicable to a Seller
or any of the Assets.
4.3. Binding Obligation. This Agreement has been duly executed and
delivered on behalf of Sellers. All documents and instruments required hereunder
to be executed and delivered to Buyer shall have been duly executed and
delivered. This Agreement does, and such documents and instruments will,
constitute legal, binding obligations of the Sellers in accordance with their
terms.
4.4. No Breach of Statute, Decree or Contract. The execution,
delivery and performance of this Agreement by a Seller does not and will not
breach any Legal Requirement, will not at the Closing conflict with or result in
a breach of or default under any agreement or any order, writ, injunction,
decree, contract, agreement or instrument to which a Seller is a party or by
which the Assets are or may be bound, will not result in the creation or
imposition of any lien, charge or encumbrance of any nature upon any of the
Assets, and will not give to others any interest or rights in, or with respect
to any of the Assets, except to the extent of Permitted Encumbrances.
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4.5. No Litigation or Adverse Events. Except as set in Schedule
4.5, to the best of Sellers' knowledge there is no suit, claim or action, or
legal, administrative, arbitration or other proceeding, or governmental
investigation, pending or, to the Sellers' knowledge, threatened, by or against
the Sellers or any of them or the Assets, and no event or condition of any
character, to the Sellers' knowledge, pertaining to the Sellers or Assets, that
could prevent the consummation of the transactions contemplated by this
Agreement or which might result in a material loss of any portion of the Assets,
a material diminution in the value of any of the Assets or a material
interference with the use and enjoyment of any of the Assets.
4.6. Taxes. Since AREC became Operator, AREC has paid and
discharged all Taxes, assessments, excises and other levies which, if not paid,
could constitute liens or charges against the Assets except for Taxes being
contested in good faith and by appropriate proceedings. Sellers remains
responsible for their share of any Taxes due and owing for periods prior to the
Effective Time.
4.7. Accuracy of Documents. All copies of Oil and Gas Contracts,
provided by the Sellers in connection with the transactions contemplated hereby,
are complete and accurate and have not been amended or modified by any oral
agreements.
4.8. Broker's Fees. The Sellers have not employed or retained any
broker or finder in connection with the sale of the Assets hereunder to the
Buyer, which would give rise to any fees to any third party in connection with
such sale.
4.9. Title. The Assignments will convey to Buyer, subject to
Existing Burdens, Sellers' title to the Assets without reservation. Other than
the Existing Burdens, Sellers have not created any liens, claims or Encumbrances
affecting the Assets. Sellers shall provide a Special Warranty of title to the
Assets to Buyer by, through and under Sellers, but not otherwise, with full
power of substitution and subrogation.
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EXCEPT FOR THE SPECIAL WARRANTIES OF TITLE GIVEN BY SELLERS IN
THE ASSIGNMENTS, SELLERS DISCLAIM ANY WARRANTIES EXPRESS AND IMPLIED, INCLUDING
WITHOUT LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE (INCLUDING WARRANTIES WITH RESPECT TO THE PRESENCE OF ENVIRONMENTAL
CONDITIONS, EXCEPT AS SET FORTH IN PARAGRAPH 4.13, OR NATURALLY OCCURRING
RADIOACTIVE MATERIAL AFFECTING SUCH PERSONAL PROPERTY) OF ANY PROPERTY REAL,
PERSONAL OR MIXED OR EQUIPMENT (INCLUDING PIPELINE EQUIPMENT) CONVEYED TO AND
ACQUIRED BY BUYER, WITH ALL SUCH REAL AND PERSONAL PROPERTY AND EQUIPMENT BEING
TRANSFERRED, ASSIGNED, SOLD, PURCHASED, ACCEPTED AND ACQUIRED "AS IS" AND "WHERE
IS" WITHOUT WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY.
4.10. Status of Leases.
4.10.1. Payments. Since AREC became Operator, all Royalties,
Overriding Royalties, rentals, shut-in royalties and other such payments due
under the Oil and Gas Properties have been properly and timely paid (except
where Royalty payments have been legally suspended to Royalty owners whose
whereabouts are unknown or who have title defects). AREC and CMS remain
responsible for their share of any payments which may be determined to be due
for periods prior to the Effective Time.
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4.10.2. Working Interests. The Working Interests of AREC and
CMS, in the Oil and Gas Properties is represented on Schedule 1.32.
4.10.3. Net Revenue Interests. AREC's and CMS's Net Revenue
Interests in, and DRI's Net Profits Interest from, the Oil and Gas Properties is
represented on Schedule 1.32.
4.10.4. Compliance with Laws. AREC as operator of the Oil and
Gas Properties has complied in all material respects with all applicable laws,
regulations and orders of all governmental agencies having jurisdiction over
those Assets.
4.11. Necessary Action. Sellers shall take or cause to be taken
all such actions, as would a prudent businessman under the same or similar
circumstances, as may be necessary and advisable to consummate and make
effective the sale of the Assets contemplated by this Agreement and to assure
that the Sellers will not be under any material corporate, legal or contractual
restriction that would prohibit or delay the timely consummation of such
transactions; provided, however, that Sellers shall not be required to (i) file
suit or assume any additional liabilities in performing its obligations
hereunder, or (ii) to perform any title curative except as set forth in Article
VI hereof.
4.12. No Default. AREC and CMS are not in default under, and have
not received a notice of default or termination (to include a self-executing
termination clause under an oil and gas lease) with respect to, any provision of
an oil and gas lease, an Oil and Gas Contract affecting the Oil and Gas
Properties, or the title of the Sellers thereto. Except for Permitted
Encumbrances, no condition exists that with notice or lapse of time or both
would constitute a default under any mortgage, indenture, loan credit agreement
or other agreement or instrument evidencing indebtedness for borrowed money, or
create a lien, charge or other Encumbrance on the Oil and Gas Properties.
Neither AREC nor CMS have received any notice of default with respect to, any
order, writ, injunction or decree of any court, commission or administrative
agency in connection with the ownership, development or operation of the Oil and
Gas Properties, or any part thereof, which would materially adversely affect the
value of the Oil and Gas Properties.
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4.13. Environmental Claims. To the best of Sellers' knowledge
there is no Environmental Condition in, on or under any of the Assets which has
not been disclosed to Buyer prior to the Closing Date. The Sellers have not
received and have no knowledge of any notice of or any threat of any claim,
suit, proceeding, inquiry, investigation, or judicial or administrative action
arising out of or based upon any Environmental Law, pertaining to directly or
indirectly, any of the Assets.
4.14. Existing Burdens. AREC and CMS represent that to the Lease
Burdens and other Existing Burdens on the Wells do not reduce the Net Revenue
Interest below the percentages set forth on Schedule 1.32. AREC and CMS do not
warrant the represented Net Revenue Interest, except by, through and under AREC
and CMS, but not otherwise. DRI represents that it is entitled to receive thirty
percent (30%) of AREC's Net Profits from the Oil and Gas Properties and that it
has not created or permitted any Existing Burden on or against its Net Profits
Interest except that mortgage and first security interest granted to PNC Bank,
National Association ("Mortgage"), which Mortgage shall be removed at Closing.
DRI does not warrant its Net Profits Interest, except by, through and under it,
but not otherwise.
4.15. Permits. All permits necessary for the operation of the
Wells are in full force and effect.
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4.16. Production. AREC, as operator of the Assets, has advised
Buyer of all notices received by it, whether received orally or in writing, as
to any mechanical difficulty or downhole problem with any Well which is or with
the passage of time would materially adversely affect Production from such Well.
4.17. Preferential Right to Purchase. Sellers have not granted to
any person a preferential right to purchase the Assets or production therefrom,
or incurred an overproduced gas balancing obligation or other production
inbalance.
ARTICLE V--THE BUYER'S REPRESENTATIONS AND WARRANTIES
5. The Buyer represents and warrants to each Seller as follows:
5.1. Corporate. The Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Pennsylvania. The Buyer has duly authorized the execution, delivery and
performance of this Agreement by all necessary corporate action, and the same is
a binding obligation of the Buyer, enforceable in accordance with its terms.
5.2. No Breach of Statute or Contract. The execution, delivery and
performance of this Agreement will not breach any statute or regulation of any
governmental authority, and will not at the Closing conflict with or result in a
breach of or default under any of the terms, conditions, or provisions of the
Buyer's Certificate of Incorporation or by-laws or any order, writ, injunction,
decree, agreement or instrument to which the Buyer is a party or by which it is
or may be bound.
5.3. Environmental Inspection. Buyer acknowledges that it has had
ample opportunity to inspect the Assets, has actually inspected the Assets and
is aware of their condition. In acquiring the Assets, Buyer is relying on its:
(i) own knowledge of the Assets based upon its inspection of the Assets pursuant
to Article VII hereof; (ii) as the former operator of the Assets; (iii) the
prior owner of the Assets and original assignor to CMS; (iv) Affiliate, Castle
Energy Corporation, currently owing a Working Interest in the Assets, and not on
any representation or warranty given by the Sellers herein.
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5.4. Prior Operator. Buyer acknowledges that it was the operator
of the Assets from the initial drilling of the Wells until June 17, 1997 when
operations transferred to AREC and who, or its Affiliate, has owned a Working
Interest in the Assets since their creation.
5.5. Retention of Records. Buyer acknowledges that it has retained
and has in its possession the original records and title reports relating to the
Oil and Gas Properties.
5.6. Sophisticated Buyer. Buyer represents and warrants that it is
an experienced and sophisticated oil and gas company, familiar with the Assets,
operation of the Assets and other oil and gas properties, and is making this
acquisition based upon its own due diligence and knowledge of the Assets without
reliance on any representation or warranty of Sellers other than those expressly
set forth in this Agreement.
5.7. Broker's Fees. Buyer has not employed or retained any broker
or funder in connection with the purchase of the Assets hereunder from the
Sellers which would give rise to any fees to any third party in connection with
such sale.
ARTICLE VI--TITLE
6.1. Pre-Closing Examination. Prior to the Closing Date, Buyer
shall conduct such examinations of the Title to the Assets as Buyer deems
necessary, in its sole and absolute discretion, to include, by way of example
and not limitation, review of courthouse records, physical inspection of the
surface estate of the Oil and Gas Properties, those Books and Records in AREC's
possession and those title reports and other land records in its own possession
relating to the Oil and Gas Properties, to determine that since June 17, 1997,
neither AREC nor CMS had created a condition such that they, or either of them
could not convey to Buyer "Good and Defensible Title" ("Title Defect").
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6.2. Good and Defensible Title. For the purposes of this
Agreement, "Good and Defensible Title" shall mean such title to the Assets, by,
through and under the Sellers, but not otherwise, which Sellers, or Buyer as
successor in interest to Sellers, would be expected to: (a) receive not less
than the Net Revenue Interest set forth on Schedule 1.32 in all hydrocarbons
produced, saved and sold from the Oil and Gas Properties; (b) bear not more than
AREC's and CMS's Working Interest, without increase, as set forth on Schedule
1.32; and, (c) free from any Encumbrance created by Sellers.
6.3. Notice of Title Defect. Not later than twelve o'clock noon,
the last working day prior to the Closing Date, Buyer must notify Sellers, in
writing, of any matter that Buyer considers to be a Title Defect ("Title Defect
Notice"), which Title Defect Notice shall include: (i) a specific description of
the matter Buyer asserts as a Title Defect; and (ii) a specific description of
the Oil and Gas Property or the portion of the Oil and Gas Property that is
affected by the Title Defect.
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6.3.1. For the purposes of this Article VI, the hypothecation
of DRI's Net Profits Interest to PNC Bank, National Association ("PNC") and
AREC's Working Interest to PNC shall not be deemed a "Title Defect" provided
that such hypothecations shall be released at Closing.
6.4. Title Failure. Sellers shall have until February 14, 2000 in
which to attempt to cure any Title Defect or to advise Buyer of their inability
to do so or their election not to do so. Any Title Defect that Sellers are
unwilling to cure shall be deemed a title failure ("Title Failure")
6.5. Title Failure Adjustments. Buyer shall be entitled to a
credit in the Final Settlement Statement, under Paragraph 10.8 below, for any
Title Failure in accordance with that schedule of Asset values set forth in
Schedule 10.6; provided however, Buyer shall not be entitled to any credit for
Title Failure unless and until the aggregate amount of Title Failures exceed Ten
Thousand Dollars ($10,000) and then only for the amount in excess of such
amount.
ARTICLE VII--ENVIRONMENTAL EXAMINATION
7.1. Pre-Closing Examination. Prior to the Closing Date, Buyer and its
authorized representatives, at Buyer's sole risk and expense, shall have the
right to enter upon and inspect the real and personal properties comprising the
Oil and Gas Properties, and to conduct such well, environmental and other tests
and assessments as Buyer shall deem appropriate. Buyer shall repair any damages
to the Oil and Gas Properties resulting from its inspection. As part of its
inspection of the Oil and Gas Properties, Buyer and its authorized
representatives shall have the right to conduct soil and water tests and
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borings, and generally to conduct such tests, examinations, investigations and
studies as may be necessary or appropriate in Buyer's sole judgment to make an
environmental assessment of the Oil and Gas Properties. Buyer shall keep any
data or information acquired through such examination and the results of all
analyses of such data and information strictly confidential and shall not
disclose the same to any person or agency without the prior written approval of
Sellers unless such disclosure is required by law. If Buyer has discovered in
its environmental assessment an Environmental Condition, Buyer shall notify
Seller of such circumstances as soon as practicable, but in no event less than
one (1) day prior to Closing.
7.2. Environmental Condition Attributable to Buyer. Should an
identified Environmental Condition be attributable to the acts of Buyer while it
was the "Driller" (as that term is defined in that certain Turnkey Drilling
Contract by and between CMS and Buyer) of the Oil and Gas Properties, then
Sellers shall have no responsibility for the cure or remediation thereof and
Buyer will accept the Assets "AS IS" without right of offset or adjustment for
any such Environmental Condition. A list of Environmental Conditions for which
Buyer is responsible may be attached hereto after the Closing Date as Schedule
7.3.
7.3. Environmental Conditions Attributable to AREC and CMS. If
Buyer properly notifies Sellers of an Environmental Condition related to an Oil
and Gas Property and attributable to AREC and/or CMS, Buyer may (i) waive the
Environmental Condition and close, or (ii) request AREC and CAMI to cure the
Environmental Condition. If Buyer asks AREC and CMS to cure an Environmental
Condition, and if the aggregate amount of all such Environmental Conditions
exceeds Ten Thousand Dollars ($10,000), AREC and CMS have the option (i) to cure
-22-
<PAGE>
the Environmental Condition, or (ii) to exclude the Oil and Gas Property
affected by the Environmental Condition from this Agreement. If AREC and CMS
elect to cure the Environmental Condition, but the cure has not been completed
by Closing, the Oil and Gas Property affected by the Environmental Condition
shall not be conveyed to Buyer at Closing, the Purchase Price shall be reduced
by the amount allocated to such Oil and Gas Property in Schedule 10.6. If the
Environmental Condition is cured by February 14, 2000, within five (5) days
after the Environmental Condition is cured, Seller will convey to Buyer the Oil
and Gas Property affected by the Environmental Condition and the amount
allocated for such Oil and Gas Property on Schedule 10.6 shall be paid to
Sellers as part of the Final Settlement Statement.
7.3.1. An Environmental Condition shall be deemed "cured"
when: (i) the Buyer and Sellers agree, in writing, that the Environmental
Condition has been cured; or (ii) when the Sellers present to Buyer the
certification by a licensed environmental engineer that the Environmental
Condition has been "cured". Any disagreement between the parties shall be
resolved in accordance with the Dispute Resolution provision of Paragraph 14.11
below.
7.4. Environmental Purchase Price Adjustment. Notwithstanding any
provision hereof to the contrary, there shall be no reduction in the Purchase
Price for uncured Environmental Defects unless, and only to the extent that, the
aggregate amount of such uncured Environmental Defects exceeds Ten Thousand
Dollars ($10,000), and then only for the amount in excess of such amount.
-23-
<PAGE>
ARTICLE VIII--CONDITIONS TO THE BUYER'S OBLIGATIONS TO CLOSE
8. The Buyer's obligation to close shall be subject to the satisfaction
of the following conditions prior to or at the Closing, unless waived by the
Buyer.
8.1. Compliance With Agreement. The Sellers shall have performed
and complied in all respects with all his obligations under this Agreement which
are to be performed or complied with by it prior to or at the Closing.
8.2. No Adverse Change. Neither the Assets nor the business of the
Sellers shall have been adversely affected in any material way, subsequent to
the execution hereof, and there shall have been no substantial uninsured or
underinsured claim of personal injury or of damage to the Assets.
8.3. Litigation. No litigation or other proceeding shall have been
commenced or threatened against the Buyer or the Sellers, which in the sole
opinion of the Buyer would materially and adversely affect its ownership, or the
value, of the Assets.
8.4. Accounting. Buyer shall have received from Sellers a complete
accounting of all funds paid to and expended by Sellers as the operator of the
Assets subsequent to the Effective Date.
ARTICLE IX--CONDITIONS TO THE SELLERS' OBLIGATION TO CLOSE
9. The Sellers' obligation to close shall be subject to the
satisfaction of the following conditions prior to or at the Closing, unless
waived by the Sellers:
9.1. Compliance With Agreement. The Buyer shall have performed and
complied in all material respects with all its obligations under this Agreement
which are to be performed or complied with by it prior to or at the Closing.
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<PAGE>
9.2. Litigation. No litigation or other proceeding shall have been
commenced or threatened against the Sellers or the Buyer, which in the sole
opinion of the Sellers would materially and adversely affect its ownership, or
the value, of the Assets.
9.3. Accounting. Buyer shall account to Sellers for all funds
received or obligations paid, by Buyer subsequent to the Operations Assumption
Date and attributable to the Assets prior to the Effective Date.
9.4. Operations. Buyer having assumed and conducted operations in
accordance with Article XI hereof and in the Ordinary Course of Business.
ARTICLE X--CLOSING; TERMINATION; POST CLOSING
10. Closing.
10.1. Place. The Closing shall take place at such location as
mutually agreed upon by the Buyer and the Sellers.
10.2. Termination. At any time before the Closing, this Agreement
may be terminated: (i) by mutual consent of the parties; (ii) by either the
Buyer or the Sellers if there has been a material misrepresentation, material
breach of warranty or material breach of covenant by the other; (iii) by the
Buyer if any condition set forth in Article VIII shall not be satisfied at the
Closing; or (iv) by the Sellers if any condition set forth in Article IX shall
not be satisfied at the Closing.
10.3. Transfer of Assets. Sellers will, subject to the provisions
of this Agreement: (i) execute and deliver to Buyer one or more Assignments
satisfying the requirements of Paragraph 2.4; and (ii) transfer to Buyer by
check all of Sellers' right, title and interest in and to any funds currently
held by AREC, as operator, in escrow or suspense with respect to and
attributable to the Assets along with associated records regarding and a list by
interest owner of such funds, to the extent that such records were transferred
to AREC by CECI when AREC assumed operations on June 17, 1997 or created by
AREC.
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<PAGE>
10.4. Transfer of Books and Records. Not later than thirty (30)
days after Closing, AREC will transfer, convey and deliver unto Buyer (to the
extent not theretofore delivered) copies of all of the Books and Records in
AREC's possession as operator, whether in manual or electronic form, subject to
any contractual restrictions with third parties. To the best of Sellers'
knowledge and belief, Sellers are not a party to any document and none of the
Books and Records is subject to any contract which would restrict or otherwise
prevent the transfer of all Books and Records in Sellers' possession, or the
possession of Sellers' agents or representatives, to Buyer. Sellers shall have
reasonable access during normal business hours for any reasonable purpose to the
files delivered to Buyer hereunder and in Buyer's possession; provided, however,
Buyer shall have no obligation to keep or maintain the files or any other
records or documents beyond three (3) years after the Closing Date unless Buyer
surrenders such documents to Sellers or Sellers consent to the destruction of
the such files, records or documents prior to such date. Sellers shall not be
obligated to make or deliver any geological or engineering interpretations in
the Books and Records. Sellers may make and retain such copies of the Books and
Records as Sellers' deem necessary for the conduct of their respective business;
provided, however, that Sellers will not, without the express written consent of
the Buyer, permit any third party, other than Sellers' attorneys and
accountants, access to such records, except as may be required to comply with
any order of any court or governmental agency to include the Internal Revenue
Service.
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<PAGE>
10.5. Taxes. All Taxes shall be pro-rated between AREC, CMS and
Buyer as of the Effective Date. AREC and CMS shall be charged for all such Taxes
based on ownership of the Assets or Production the Assets actually sold prior to
the Effective Date. Buyer shall be charged for all such Taxes based on ownership
of the Assets or Production from the Assets actually sold as of the Effective
Date. Buyer shall pay all documentary, filing and recording fees for the
Assignments required in connection with the transaction contemplated by this
Agreement.
10.6. Purchase Price Allocation. Sellers and Buyer recognize that
reporting requirements of Sec. 1060(b) of the Internal Revenue Code, and the
regulations promulgated thereunder, may apply to the transaction contemplated by
this Agreement. If so, Sellers and Buyer agree that the Purchase Price shall be
allocated among the assets as mutually agreed by Sellers and Buyer to comply
with and satisfy the requirements of Sec. 1060(b) and applicable regulation.
Sellers and Buyer agree that no Asset shall be allocated a negative value. The
allocated value of the Assets is set forth on Schedule 10.6.
10.7. Payment. Buyer shall pay to Sellers the Purchase Price
pursuant to Article II.
10.8. Final Settlement Statement. Within sixty (60) days after the
Closing, or as soon as practical thereafter, Buyer shall prepare, in accordance
with this Agreement, the Final Settlement Statement, setting forth any
appropriate adjustments or payments not finally determined as of the Closing
Date. Buyer shall submit the Final Settlement Statement to Sellers and shall
afford Sellers access to Buyer's records pertaining to the computation of the
Final Settlement Statement. Sellers shall deliver to Buyer a written report
containing any changes which Sellers propose be made to the Final Settlement
-27-
<PAGE>
Statement. The parties shall employ that degree of effort as would prudent
business persons engaged in on going business relationships to reach agreement
as to the amounts due pursuant to such Final Settlement statement no later than
thirty (30) days after the submission of the Final Settlement Statement to
Sellers. The date upon which such agreement is reached shall be called the
"Settlement Date".
10.8.1. On the Settlement Date, should one party be obligated
to the other by reason of the Final Settlement Statement, the indebted party
shall pay to the other party, in immediately available funds, those monies
determined to be due under the Final Settlement Statement. Until paid, all past
due amounts under this Paragraph 10.8 shall bear interest at the rate of prime
plus two percent (2%), to move, as established by PNC Bank, Pittsburgh,
Pennsylvania (computed based on a 360 day year).
ARTICLE XI--OPERATIONS
11.1. Effective the Closing Date , CECI shall assume and take over
all duties as operator of the Assets ("Operations Assumption Date").
11.2. AREC and CECI shall cooperate in the completion of all
documentation required by the Commonwealth of Pennsylvania for the change of
operator. CECI agrees to post the required operator's bond and plugging bonds as
required by the Pennsylvania Department of Environmental Protection.
ARTICLE XII--INDEMNIFICATION
12.1. Indemnification of the Buyer. AREC and CMS shall jointly
indemnify and hold the Buyer harmless against, and reimburse the Buyer on demand
for, all actual damage, loss, cost or expense (including reasonable attorneys'
fees incurred in defending or settling any claim for such damage, loss, cost or
expense) incurred by the Buyer resulting from any material breach of the
Sellers' representations, warranties or covenants in this Agreement.
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<PAGE>
12.2. Indemnification of the Sellers. The Buyer shall indemnify
and hold the Sellers, individually and jointly harmless against, and reimburse
the Sellers on demand for, all actual damage, loss, cost or expense (including
reasonable attorneys' fees incurred in defending or settling any claim for such
damage, loss, cost or expense) incurred by the Sellers resulting from any
Environmental Condition created after the Closing Date, any material breach of
the Buyer's representations, warranties or covenants in this Agreement.
12.3. Notwithstanding the above, nothing in this Agreement shall
be construed to: (i) require the Buyer to indemnify Sellers against pre-existing
liabilities of Sellers, including liabilities for Environmental Conditions,
incurred, created or existing prior to the Effective Date; (ii) require Sellers
to indemnify Buyer against pre-existing liabilities of Buyer, including
liabilities for Environmental Conditions, incurred, created or existing prior to
the Effective Date; (iii) amend any contractual rights between the parties
regarding any Title Defect or Environmental Condition; or (iv) alter or amend
each Party's obligation or rights under any Environmental Law or Oil and Gas
Contracts for any Environmental Condition, whether know, unknown as of the
Closing Date.
ARTICLE XIII--NOTICES
13.1. Notices. Any notice, request demand, statement or other
communication required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered in person, or if telegraphed, or
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<PAGE>
by courier, or mailed by certified mail, return receipt requested, when actually
received, and may be given as follows:
If to Sellers:
American Refinery and Exploration Company
100 Four Falls Corporate Center, Suite 215
West Conshohocken, Pennsylvania 19428
Attention: Thomas F. Halloran
Deven Resources, Inc.
983 Old Eagle School Road, Suite 615
Wayne, Pennsylvania 19087
Attention: Gary J. Novinskie
CMS/Castle Developmental Energy Fund I, L.P.
c/o CMS Affiliated Partnership
One Bala Plaza, Suite 412
Bala Cynwyd, Pennsylvania 19004
Attention: Richard A. Mitchell
with copies to:
Ehmann, Van Denbergh & Trainor, PC
Two Penn Center Plaza, Suite 725
Philadelphia, Pennsylvania 19102-1707
Attention: C. Warren Trainor, Esquire
If to Buyer:
Castle Exploration Company, Inc.
61 McMurray Road, Suite 204
Pittsburgh, PA 15241
Attention: Timothy M. Murin
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<PAGE>
with copies to:
Castle Exploration Company, Inc.
5623 North Western
Oklahoma City, Oklahoma 73118
Attention: William C. Liedtke, Esquire
Or to such other address as such party may designate by ten (10) days advance
written notice to the other party.
ARTICLE XIV--MISCELLANEOUS
14.1. Exclusiveness. This Agreement embodies all of the
representations, warranties and agreements of the parties hereto with respect to
the subject matter hereof, and all prior understandings, representations and
warranties (whether oral or written) with respect to such matters are
superseded. This Agreement may not be amended, modified, waived, discharged or
terminated except by an instrument in writing signed by the party or an
executive officer of a corporate party against whom enforcement of the change,
waiver, discharge or termination is sought.
14.2. Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted.
14.3. Successors. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
14.4. Assignment. This Agreement may not be assigned without the
prior written consent of the other party.
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<PAGE>
14.5. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same agreement.
14.6. Neither Party Drafter. The parties hereto agree that this
Agreement is the product of negotiation between the parties, that counsel during
its negotiations has represented each and that neither party shall be deemed the
drafter hereof.
14.7. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to conflicts of laws provisions.
14.8. Paragraph Headings. The paragraph headings in this Agreement
are for convenience of reference only and shall not be deemed to alter or affect
any provision hereof.
14.9. Costs. Each party agrees to bear its legal, accounting and
other fees incurred in the negotiation of the transaction contemplated hereby,
the conduct of its due diligence and the preparation of the documents addressed
herein.
14.10. Exhibits. The Exhibits and Schedules attached hereto,
together with all documents incorporated by reference therein, form an integral
part of this Agreement and are hereby incorporated into this Agreement wherever
reference is made to them to the same extent as if they were set out in full at
the point at which such reference is made. Any Schedule attached hereto after
the Closing Date shall be deemed to have been a party of this Agreement as of
the Closing Date. Any such "Post-Closing" Schedule shall be initialed and dated
by each party hereto or, if the finding of the Mediation (as set forth in
Paragraph 14.11 below), then the results of the Mediation may be attached hereto
and shall become a part hereof for all purposes.
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<PAGE>
14.11. Dispute Resolution. The parties will attempt in good faith
to resolve any and all controversies of every kind and nature between the
parties to this Agreement arising out of or in connection with the existence,
construction, validity, interpretation, performance, non-performance, operation,
Title, Environmental Condition, breach, continuance or termination of this
Agreement (each a "Dispute") promptly by negotiations between senior executives
of the parties who have the authority to resolve the Dispute. Within twenty (20)
days after the receipt of a notice of the existence of a dispute, the receiving
party shall submit to the other (or others) a written response. The notice and
response shall included (a) a statement of each party's position and a summary
of the evidence and arguments supporting its (their) position, and (b) the name
and title of the executive who will represent the party. The executives shall
meet at a mutually acceptable time and place within thirty (30) days of the date
of the disputing party's notice and thereafter as often as they deem reasonably
necessary to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within sixty (60) days of the
disputing party's notice, or of the party receiving said notice will not meet
within the allotted thirty (30) day period, either party may initiate an action
before a neutral arbitrator under the rules of the American Arbitration
Association sitting in Philadelphia, Pennsylvania or under Alternative Dispute
Resolution ("Mediation"). Any judgment, award or finding on behalf of one party
against the other by the Mediation may be enforced by the Court of Common Pleas
of Montgomery County, Pennsylvania or any other court of competent jurisdiction.
The losing party in any such Mediation shall pay all costs associated therewith.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first written above.
SELLERS
-------
<TABLE>
<CAPTION>
<S> <C>
Attest: AMERICAN REFINING AND
EXPLORATION COMPANY
/s/ C. Warren Trainor By: /s/ Thomas F. Halloran
- ----------------------------------------------------- -------------------------------------
Assistant Secretary Thomas F. Halloran, President
Attest: DEVEN RESOURCES, INC.
/s/ C. Warren Trainor By: /s/ Gary J. Novinskie
- ----------------------------------------------------- -------------------------------------
Assistant Secretary Gary J. Novinskie, Vice President
Attest: CMS/CASTLE DEVELOPMENTAL
ENERGY FUND I, L.P.
By: CMS Energy Associates, L.P.
Its general partner
By: MSPS Energy, Inc.
Its general partner
/s/ Thomas D. Eyidio
- -----------------------------------------------------
Thomas D. Eyidio - Secretary
By: /s/ Marian E. Cohen
-------------------------------------
Name: Marian E. Cohen
-------------------------------------
Its: Vice President
-------------------------------------
BUYER
-----
Attest: CASTLE EXPLORATION COMPANY, INC.
/s/ Susan Pyle By: /s/ Richard E. Staedtler
- ----------------------------------------------------- -------------------------------------
Secretary Name: Richard E. Staedtler
-------------------------------------
Its: CEO
-------------------------------------
</TABLE>
-34-
<PAGE>
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------------------------------------
1999 1998
--------------------------- --------------------------
Basic Diluted Basic Diluted
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
I. Shares Outstanding, Net of Treasury
Stock Purchased During the Period:
Stock, net 7,639,287 7,639,287 8,822,187 8,822,187
Purchase of treasury stock (weighted) (511,548) (511,548)
---------- ---------- ---------- ----------
7,127,739 7,127,739 8,822,187 8,822,187
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 120,093 181,539
---------- ---------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 7,127,739 7,247,832 8,822,187 9,003,726
========== ========== ========== ==========
IV. Net Income $ 259 $ 259 $ 2,511 $ 2,511
========== ========== ========== ==========
V. Net Income Per Share $ .04 $ .04 $ .28 $ .28
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Company's
consolidated financial statements for the quarter ended December 31, 1999
included in Part I Financial information and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-2000
<CASH> 12,389
<SECURITIES> 6,406
<RECEIVABLES> 4,975
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,644
<PP&E> 40,286
<DEPRECIATION> 8,456
<TOTAL-ASSETS> 58,503
<CURRENT-LIABILITIES> 6,468
<BONDS> 0
0
0
<COMMON> 5,752
<OTHER-SE> 46,283
<TOTAL-LIABILITY-AND-EQUITY> 58,503
<SALES> 4,259
<TOTAL-REVENUES> 4,259
<CGS> 0
<TOTAL-COSTS> 4,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 264
<INCOME-TAX> 5
<INCOME-CONTINUING> 259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
