<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
-------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
Commission file number: 0-10990
-----------
CASTLE ENERGY CORPORATION
----------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 76-0035225
- -------------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
One Radnor Corporate Center, Suite 250, 100 Matsonford Road, Radnor, Pennsylvania 19087
- -----------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (610) 995-9400
---------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
------ --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,817,886 shares of
Common Stock, $.50 par value outstanding as of May 5, 2000.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
Part I. Financial Information
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 2000 (Unaudited)
and September 30, 1999................................................. 1
Consolidated Statements of Operations - Three Months
Ended March 31, 2000 and 1999 (Unaudited).............................. 2
Consolidated Statements of Operations - Six Months Ended
March 31, 2000 and 1999 (Unaudited).................................... 3
Consolidated Statements of Cash Flows - Six Months Ended
March 31, 2000 and 1999 (Unaudited).................................... 4
Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income - Year Ended September 30, 1999
and Six Months Ended March 31, 2000 (Unaudited)........................ 5
Notes to the Consolidated Financial Statements (Unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk.................. 21
Part II. Other Information
Item 1. Legal Proceedings...................................................... 22
Item 6. Exhibits and Reports on Form 8-K....................................... 22
Signature .................................................................................... 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------- -------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................................. $ 11,281 $ 22,252
Restricted cash ............................................................ 2,091 770
Accounts receivable ........................................................ 3,911 5,172
Marketable securities ...................................................... 10,077 4,194
Prepaid expenses and other current assets .................................. 379 594
Note receivable - Penn Octane Corporation .................................. 500
Estimated realizable value of discontinued net refining assets ............. 800 800
--------- ---------
Total current assets ..................................................... 29,039 33,782
Property, plant and equipment, net:
Natural gas transmission ................................................... 57 60
Furniture, fixtures and equipment .......................................... 226 298
Oil and gas properties, net (full cost method):
Proved properties .................................................. 28,488 24,765
Unproved properties not being amortized ............................ 3,562 1,862
Other assets ................................................................... 29
--------- ---------
Total assets ............................................................. $ 61,372 $ 60,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable ........................................................... $ 350 $ 368
Accounts payable ........................................................... 2,442 2,918
Accrued expenses ........................................................... 371 802
Net refining liabilities retained ........................................ 3,205 3,205
--------- ---------
Total current liabilities ................................................ 6,368 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 March 31, 2000 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 ...................................... 8,160 2,396
Retained earnings .......................................................... 38,004 38,716
--------- ---------
119,281 114,229
Treasury stock at cost - 4,491,017 shares at March 31, 2000 and
4,282,217 shares at September 30, 1999 ................................. (64,277) (60,726)
--------- ---------
Total stockholders' equity ............................................... 55,004 53,503
--------- ---------
Total liabilities and stockholders' equity ............................... $ 61,372 $ 60,796
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ...................................................... $ 21,697
-----------
21,697
-----------
Exploration and production:
Oil and gas sales .............................................. $ 3,318 581
Well operations ................................................ 185 87
----------- -----------
3,503 668
----------- -----------
3,503 22,365
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases .................................................. 13,318
Transportation ................................................. 494
General and administrative ..................................... 67
Depreciation and amortization .................................. 2,365
-----------
16,244
-----------
Exploration and production:
Oil and gas production ......................................... 1,636 287
General and administrative ..................................... 361 149
Depreciation, depletion and amortization ....................... 941 82
----------- -----------
2,938 518
----------- -----------
Corporate general and administrative expenses .................... 952 778
----------- -----------
3,890 17,540
----------- -----------
Operating income (loss) .............................................. (387) 4,825
----------- -----------
Other income:
Interest income .............................................. 195 478
Other income (loss) .......................................... (90) 33
----------- -----------
105 511
----------- -----------
Net income (loss) before provision for income taxes .................. (282) 5,336
----------- -----------
Provision for (recovery of) income taxes:
State ........................................................ 39
Federal ...................................................... (5) 1,359
----------- -----------
(5) 1,398
----------- -----------
Net income (loss) .................................................... ($ 277) $ 3,938
=========== ===========
Net income (loss) per share:
Basic ........................................................ ($ .04) $ .46
=========== ===========
Diluted ...................................................... ($ .04) $ .46
=========== ===========
Weighted average number of common and potential dilutive common shares
outstanding:
Basic ......................................................... 7,012,887 8,484,699
=========== ===========
Diluted ....................................................... 7,012,887 8,615,901
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
----------- ------------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ..................................................... $ 42,152
-----------
42,152
-----------
Exploration and production:
Oil and gas sales ............................................. $ 7,403 972
Well operations ............................................... 359 177
----------- -----------
7,762 1,149
----------- -----------
7,762 43,301
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ................................................. 26,264
Transportation ................................................ 953
General and administrative .................................... 156
Depreciation and amortization ................................. 4,731
-----------
32,104
-----------
Exploration and production:
Oil and gas production ........................................ 3,185 481
General and administrative .................................... 859 396
Depreciation, depletion and amortization ...................... 2,213 149
----------- -----------
6,257 1,026
----------- -----------
Corporate general and administrative expenses ................... 1,860 1,891
----------- -----------
8,117 35,021
----------- -----------
Operating income (loss) ............................................. (355) 8,280
----------- -----------
Other income:
Interest income ............................................. 394 945
Other income (loss) ......................................... (57) 34
----------- -----------
337 979
----------- -----------
Net income (loss) before provision for income taxes ................. (18) 9,259
----------- -----------
Provision for (recovery of) income taxes:
State ....................................................... 78
Federal ..................................................... 2,732
----------- -----------
2,810
-----------
Net income (loss) ................................................... ($ 18) $ 6,449
=========== ===========
Net income (loss) per share:
Basic ....................................................... ($ .00) $ .75
=========== ===========
Diluted ..................................................... ($ .00) $ .73
=========== ===========
Weightedaverage number of common and potential dilutive common shares
outstanding:
Basic ....................................................... 7,070,433 8,654,763
=========== ===========
Diluted ..................................................... 7,070,433 8,808,372
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
-------- --------
<S> <C> <C>
Net cash flow provided by operating activities ............... $ 1,359 $ 13,994
-------- --------
Cash flows from investing activities:
Investment in pipelines ............................... (15)
Investment in furniture, fixtures and equipment ....... (45)
Investment in oil and gas properties .................. (7,516) (301)
Investment in note receivable - Penn Octane Corporation (500)
-------- --------
Net cash (used in) investing activities ..... (8,061) (316)
-------- --------
Cash flows from financing activities:
Dividends paid to stockholders ...................... (718) (881)
Acquisition of treasury stock ....................... (3,551) (5,552)
-------- --------
Net cash (used in) financing activities ..... (4,269) (6,433)
-------- --------
Net increase (decrease) in cash and cash equivalents ......... (10,971) 7,245
Cash and cash equivalents - beginning of period .............. 22,252 36,600
-------- --------
Cash and cash equivalents - end of period .................... $ 11,281 $ 43,845
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
OTHER COMPREHENSIVE INCOME
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30, 1999 And Six Months Ended March 31, 2000
-----------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------- Paid-In Comprehensive Comprehensive Retained
Shares Amount Capital Income Income Earnings
------ ------ ------------- ---------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1998............ 6,803,646 $3,402 $67,122 $34,836
Stock acquired.......................
Options exercised.................... 25,000 12 243
Dividends declared ($.25 per share).. (2,048)
Stock split retroactively applied.... 4,675,258 2,338 (2,338)
Comprehensive income.................
Net income......................... $ 8,266 8,266
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax........ 2,396 $2,396
---------
---------- ----- ------ $10,662 ----- ------
Balance - September 30, 1999......... 11,503,904 5,752 67,365 ========= 2,396 38,716
Stock acquired.......................
Dividends declared ($.05/share)...... (694)
Comprehensive income.................
Net income (loss).................. ($ 18) (18)
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax........ 5,764 5,764
-------
---------- ------ ------- $5,746 ------ -------
Balance - March 31, 2000............. 11,503,904 $5,752 $67,365 ====== $8,160 $38,004
========== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1999 And Six Months Ended March 31, 2000
-------------------------------------------------------------------
Treasury Stock
--------------------
Shares Amount Total
------ ------ ---------
<S> <C> <C> <C> <C>
Balance - October 1, 1998............ 3,862,917 ($53,807) $51,553
Stock acquired....................... 419,300 (6,919) (6,919)
Options exercised.................... 255
Dividends declared ($.25 per share).. (2,048)
Stock split retroactively applied....
Comprehensive income.................
Net income......................... 8,266
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax........ 2,396
--------- ------- ------
Balance - September 30, 1999......... 4,282,217 (60,726) 53,503
Stock acquired....................... 208,800 (3,551) (3,551)
Dividends declared ($.05/share)...... (694)
Comprehensive income.................
Net income (loss).................. (18)
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax........ 5,764
--------- ------- ------
Balance - March 31, 2000............. 4,491,017 ($64,277) $55,004
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month and six-month periods ended March 31, 2000 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 and six month periods ended March 31, 2000 and
1999 and for a fair statement of financial position at March 31, 2000.
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, in 1996, Powerine Oil Company ("Powerine"), one of the
Company's former 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, have been inactive for almost five
years, and are in the process of liquidation. As a result, the Company has
accounted for its refining operations as discontinued operations. Such
discontinued refining operations have not impacted the Company's operations
since September 30, 1995 although they may impact the Company's future
operations.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 4 - Contingencies/Litigation
Contingent Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries were potentially liable for
environmental costs related to air emissions, ground and water contamination,
hazardous waste disposal and third party claims related to the foregoing.
Between September 29, 1995 and December 12, 1995 both of the refineries owned by
the Company's refining subsidiaries were sold to outside parties. In each case
the purchaser assumed all environmental liabilities. Furthermore, on January 16,
1996, Powerine, the subsidiary that previously owned 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"), a subsidiary of the Company inactive 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 May 5, 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
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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 the Powerine Refinery have been transferred to others, there can be no
assurance that the parties assuming such liabilities will be able to pay them.
American Western, purchaser of the Indian Refinery, filed for bankruptcy and is
in the process of liquidation. The current owner of the 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.
An opinion issued by the U.S. Supreme Court in June 1998 in a comparable
matter supports the Company's position. Nevertheless, 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.
Litigation
Larry Long Litigation
Larry Long, the original plaintiff who filed suit against the Company on
his own behalf and for others similarly situated, seeking royalties on certain
operating fees paid to one of the Company's subsidiaries, has withdrawn from
that litigation and is no longer a plaintiff in the case. The remaining
purported class representative, Travis Crim, continues, however, to pursue the
claim.
The Company's motion for summary judgement in this case was denied in
April 2000.
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Rex Nichols et al Lawsuit
In April 2000, the Company agreed to settle this lawsuit for $120. The
Company expects to pay the settlement amount to the plaintiffs in May 2000.
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
except as indicated above.
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 such instrument 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 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).
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
The Company will continue to account for its current crude oil and any
future crude oil or 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 May 31, 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 $721 and $577 for the six
month and three month periods ending March 31, 1999, respectively.
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 at the time (approximately 22,000 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 six month and three month
periods ended March 31, 2000, oil and gas sales decreased $984 and $653,
respectively, as a result of such hedging activities.
Note 7 - Information Concerning Reportable Segments
During the six month period ended March 31, 1999, the Company operated
in two segments of the energy industry: oil and gas exploration and production
and natural gas marketing. During the six months ended March 31, 2000, 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 between these segments. The operating
income achieved by each of the Company's segments was as follows:
Six months ended March 31, 2000:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Income
------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 7,762 ($ 6,257) $ 1,505
======== ======== ========
</TABLE>
-10-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Six months ended March 31, 1999:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Income
------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 1,149 ($ 1,026) $ 123
2. Natural gas marketing 42,152 (32,104) 10,048
-------- ------- --------
$43,301 ($33,130) $10,171
======= ======= =======
</TABLE>
Three months ended March 31, 2000:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Income
------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 3,503 ($2,938) $ 565
======== ====== ========
</TABLE>
Three months ended March 31, 1999:
<TABLE>
<CAPTION>
Operating
Segment Revenues Expenses Income
------- -------- -------- ---------
<S> <C> <C> <C>
1. Oil and gas exploration and
production $ 668 ($ 518) $ 150
2. Natural gas marketing 21,697 (16,244) 5,453
-------- ------- -------
$22,365 ($16,762) $5,603
======= ======= ======
</TABLE>
Total assets applicable to each of the Company's two operating segments
were as follows:
March 31, September 30,
2000 1999
-------- ------------
Oil and gas exploration and production........ $85,201 $ 79,076
Natural gas marketing......................... 67,727 67,720
Corporate and intercompany adjustments........ (91,556) (86,000)
-------- --------
$61,372 $ 60,796
======= ========
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).
-11-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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.
Note 9 - Subsequent Events
Subsequent to March 31, 2000, the Company repurchased 195,000 shares of
its common stock for $980.
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 six month period ended March 31,
1999, 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 $42,152 while those from the Company's
exploration and production operations aggregated only $1,149. On May 31, 1999,
the Company's natural gas marketing operations ended because of the 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
six months ended March 31, 2000 and comparison with the Company's operations for
the six months ended March 31, 1999 is neither meaningful nor applicable to the
Company's expected future operations. Accordingly, we have compared exploration
and production operations for the quarter ended March 31, 2000 with exploration
and production operations for the quarter ended December 31, 1999. Conversely,
for the other components of operations and net income (corporate general and
administrative expenses, other income (loss) and provisions for income taxes) we
have continued to compare fiscal 2000 year-to-date results with fiscal 1999
year-to-date 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 quarters ended December 31,
1999 and March 31, 2000 are as follows:
-12-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, December 31,
2000 1999
--------- ---------
Production Volumes:
- ------------------
<S> <C> <C>
Barrels of crude oil (net)............................ 61,820 69,188
Mcf (thousand cubic feet) of natural gas (net)........ 876,763 1,108,491
Mcf equivalents (net) *............................... 1,247,683 1,523,619
Oil/Gas Prices:-
Crude Oil/Barrel:
-----------------
Gross.............................................. $27.65 $23.70
Hedging effects.................................... (10.81) (3.82)
--------- ---------
Net of hedging..................................... $16.84 $19.88
========= =========
Natural Gas/Mcf:
---------------
Gross.............................................. $ 2.58 $ 2.50
Hedging effects.................................... 0.02 (0.06)
--------- ---------
Net of hedging..................................... $ 2.60 $ 2.44
========= =========
Oil and Gas Production Expenses/mcf Equivalent.............. $ 1.31 $ 1.02
- ---------------------------------------------- ========= =========
</TABLE>
* 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 of oil and gas (mcf equivalents) decreased
approximately 18.1% from the first quarter of fiscal 2000 to the second quarter
of fiscal 2000. A significant portion of the production decline was expected due
to the generally fast decline curves associated with certain production acquired
from AmBrit. In addition, two wells which produced significant volumes for the
entire first quarter were shut in for most of the second quarter and contributed
to the decrease in production for the quarter. In addition, the Company's
recently acquired wells in West Delta Block 52 were shut in for most of the
quarter ended March 31, 2000 due to the reworking of the salt water disposal
well and compressor problems. The West Delta Block 52 wells produced
approximately 300 gross barrels of crude oil per day (180 net barrels per day to
the Company's interest) prior to shut down. Although these wells have been
returned to production at their previous rates, the shut down reduced
anticipated volumes for the second fiscal quarter by approximately two-thirds.
-13-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
For the quarter ended March 31, 2000, the average gross price earned
per barrel of crude oil was $27.65 versus $23.70 for the quarter ended December
31, 1999. Generally, the Company receives oil prices for most of its crude of
equal to prices posted by major purchasers plus a premium of $.50-$2.50 per
barrel. For the quarter ended March 31, 2000, the price earned by the Company
was approximately $1.96 above the average posted price. For the quarter ended
December 31, 1999, the premium above posted prices was approximately $1.89 per
barrel. For the quarter ended March 31, 2000, the Company incurred a hedging
loss of $10.81 per barrel of crude oil because it had hedged most of its
expected production for this quarter in July of 1999 based upon the average
prices of crude oil traded on the New York Mercantile Exchange (NYMEX) at that
time - $20.02 per barrel. This resulted in a net price earned per barrel of
crude oil sold of $16.84 per barrel versus an average hedged price at $20.63 per
barrel and a net price of $19.88 per barrel for the first quarter of fiscal
2000.
The Company has hedged 88,000 barrels of its expected crude oil
production through July of 2000 at an average price of $19.40 based upon NYMEX
prices. The Company has settled its hedges for 44,000 barrels of crude oil for
April and May at an average price of $27.68 per barrel resulting in a hedging
loss of $357. The Company expects that the price it realizes for its crude will
be less than the NYMEX price after taking into account the premiums over posted
crude oil prices that it receives. The Company has not hedged any of its
anticipated crude oil production expected after July 31, 2000 and thus remains
subject to crude oil price risk for anticipated crude oil production after July
31, 2000. Subsequent to March 31, 2000, crude oil prices decreased 10%-15%.
For the quarter ended March 31, 2000 average gross natural gas prices
earned by the Company were $2.58 per mcf versus $2.50 per mcf for the quarter
ended December 31, 1999. For the quarter ended December 31, 1999 hedging losses
reduced the net price earned to $2.44 per mcf. For the quarter ended March 31,
2000, hedging increased the net price earned to $2.60 per mcf. The Company has
not hedged any of its anticipated future natural gas production and thus remains
exposed to future increases or decreases in natural gas prices. Subsequent to
March 31, 2000, natural gas prices increased 15%-20% and have recently reached
their highest levels in several years. If such prices remain high the Company's
gas sales will increase because the Company sells most of its natural gas at
market prices and has not hedged any anticipated future natural gas production.
There can, however, be no assurance that natural gas prices will remain high.
Oil and gas unit production expenses for the quarter increased 28.4%
from $1.02 per mcf equivalent for the quarter ended December 31, 2000 to $1.31
per mcf equivalent for the quarter ended March 31, 2000. Most of the increase in
oil and gas production costs per mcf equivalent were due to an 18.1% production
decrease in the second quarter. Whereas production may vary due to several
factors, including depletion of production reservoirs and temporary shut downs,
production costs such as pumper salaries, operating overhead and field office
costs often remain stable or increase with time. Such is the case when the
second quarter production expenses are compared with those from the first
quarter. The Company also attributes its relatively high unit production costs
to the fact that a higher proportion of the properties acquired from AmBrit are
operated by outside
-14-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
parties who charge operating fees to operate the related wells in which the
Company has an interest. Some of these operating fees are especially high given
the volumes produced from the related wells. The Company is currently in the
process of attempting to sell 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. Finally, the Company has
recently undertaken a higher than normal number of non capitalized repair and
maintenance operations on the wells acquired from AmBrit and believes that the
level of repairs and maintenance may decrease as a result in the future.
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 six months
ended March 31, 2000, such expenses will probably increase on an absolute basis
even if they decrease on a unit basis simply because the Company owns interests
in more producing wells and larger interests in some existing wells.
Other Components of Operations
Interest income decreased $551 or 58.3% from the first half of fiscal
1999 to the first half of fiscal 2000. The decrease is primarily attributable to
a decrease in the average balance of cash outstanding during the periods being
compared.
Other income decreased $91 from income of $34 for the six months ended
March 31, 1999 to a loss of $57 for the six months ended March 31, 2000. The
primary reason for the decrease was the settlement of the Rex Nichols et al
lawsuit in April 2000 for $120. The settlement was recorded as of March 31, 2000
because the lawsuit was filed and related to transactions before March 31, 2000.
There was no similar lawsuit settlement during the six-month period ended March
31, 1999.
The tax provision for the six months ended March 31, 1999 primarily
represents the amortization of the Company's net deferred tax asset at an
effective rate of 36% of pre-tax book income. No analogous tax recovery has been
recorded for the six months ended March 31, 2000 because the only significant
income taxes the Company has paid in the last three years, federal alternative
minimum taxes, are not recoverable through carryback of losses - such as that
sustained for the six months ended March 31, 2000.
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, from January 1, 1999 to March 31, 2000, the Company
reacquired 628,100 shares of its common stock. As a result of these share
acquisitions, earnings per outstanding share for the three and six month periods
ended March 31, 2000 and 1999 have been higher than would
-15-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
have been the case if no shares had been repurchased. Subsequent to March 31,
2000, the Company acquired an additional 195,000 of its shares.
LIQUIDITY AND CAPITAL RESOURCES
All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward-looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report.
During the six months ended March 31, 2000, the Company generated
$1,859 from operating activities. During the same period the Company invested
$7,516 in oil and gas properties and $3,551 to reacquire shares of its common
stock. In addition, it paid $718 in stockholder dividends. At March 31, 2000,
the Company had $11,281 of unrestricted cash, $22,671 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 the related 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
Item 1 of Part I of this Form 10-Q.)
Expected Sources and Uses of Funds
As of May 5, 2000, the estimated minimum future cash expenditures of
the Company for the period from March 31, 2000 to September 30, 2001 are as
follows:
a. Oil and Gas Drilling
1. Development drilling on existing acreage............ $5,749
2. South Texas exploratory drilling ventures........... 1,150
3. Romanian concession ................................ 1,340
-------
$8,239
=======
The first two wells in one of the two South Texas exploratory
drilling ventures in which the Company participates resulted in
two dry holes. The Company is obligated to participate in drilling
a third exploratory well but may terminate its participation in
this venture after the third well has been drilled whether or not
it results in another dry hole.
-16-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
The above estimate of drilling costs assumes that the Company will
terminate its participation after the third well is drilled. If
the third well is successful and the Company decides to continue
to participate in the remaining nine wells originally planned, the
Company's drilling costs are expected to increase by approximately
$3,000 over that estimated above.
In the second South Texas exploratory drilling venture in which
the Company participates the first two wells drilled resulted in
one dry hole and one producing well. The Company is obligated to
participate in the drilling of two more exploratory wells in this
drilling venture and expects to do so before September 30, 2000.
If these two wells are successfully completed, the Company may
participate in two more development locations resulting in
additional drilling costs net to the Company of approximately
$950. Such additional drilling costs are not included in the
estimate above.
The initial wildcat well on one of the Company's Romanian
concessions was drilled in April and is currently being evaluated
to determine the prospectivety of the geological structure and
whether the wellbore can be completed as a producer or should be
plugged. One of the Company's subsidiaries owns a 50%
non-operating interest in the three Romanian concessions. The
subsidiary expects to participate in drilling four additional
wildcat wells before September 30, 2001. If these wildcat wells
are successful, the Company's subsidiary could participate in the
drilling of as many as fifty-five additional wells at an
additional cost of approximately $18,550. Such additional costs
are not included in the estimate above.
As a result of the foregoing, if all future drilling is
successful, the Company's future drilling costs could increase by
as much as $22,500 over that estimated above.
b. Repurchase of Company Shares - As of May 5, 2000, the Company had
repurchased 4,686,017 of its shares of common stock at a cost of
$65,257. The Company's Board of Directors previously authorized
the repurchase up to 5,819,949 shares (after taking into account
the 200% stock dividend effective January 31, 2000) to provide an
exit vehicle for investors who want to liquidate their investment
in the Company. The decision whether to repurchase up to 581,949
additional shares and/or to increase the repurchase authorization
above 5,267,966 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 January 31,
2000 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
-17-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
expects to continue to pay such dividend until the Board of
Directors, in its sole discretion, changes such policy.
d. Acquisition of Oil and Gas Properties and Other Energy Investments
- The Company is currently pursuing several other possible
material investments in the energy sector. These possible
investments include additional 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 properties they are selling given
currently high oil and gas prices. Management believes that 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. As a result, the Company may not be able to
consummate the acquisitions it seeks to make at a reasonable
price.
At March 31, 2000, the Company had available the following sources of
funds:
Unrestricted cash - March 31, 2000................................... $11,281
Line of credit - energy bank......................................... 30,000
Marketable securities of Penn Octane Corporation ("Penn Octane")..... 10,077
-------
$51,358
=======
In addition, the Company anticipates significant future cash flow from
exploration and production operations.
The Company also believes it could obtain additional financing through
the issuance of notes, debentures, preferred stock or additional shares of the
common stock of the Company should it require financing beyond the sources
listed above for a major acquisition.
The Company thus expects that it can fund all of its present drilling
commitments from its own unrestricted cash and future operating cash flows. The
Company can also use its unrestricted cash and future cash flow and the proceeds
obtainable by liquidating its marketable securities, 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
-18-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
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 (see Note 4 to the financial
statements).
b. Litigation - Long Trusts litigation. If the Company loses this
case, its cash flow and future earnings would be adversely
affected.
c. Reserve price risk - the effect of price changes on unhedged oil
and gas production. The Company has not hedged most of its
anticipated future 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 and wildcat
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. The Company's stock price has
fluctuated significantly in the last quarter. Often such
fluctuations have occurred although trading volumes have been
insignificant.
g. Foreign operation risks. Since the Company has already incurred
$1,987 and expects to spend a minimum of $1,340 in the next
seventeen months to drill on its Romanian concessions, 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.
h. The realization from the sale of the Company's investment in Penn
Octane (common stock and options) 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 common stock, such as that owned by the
Company, 1,067,667 shares, without significantly lowering the
market price may be impossible. Subsequent to March 31, 2000, the
market price of Penn Octane common stock decreased approximately
21% to $7.50 per share on May 5, 2000.
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.
-19-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
j. At the present time, the Company's general and administrative
burden is high. The Company believes that it can reduce this
burden by making several future oil and gas acquisitions without
substantially increasing its general and administrative expenses
but the Company has not been able to make any such large
acquisitions since it acquired AmBrit in June 1999. In addition,
the price at which the Company's stock has been trading has
decreased significantly during the last three months as has the
stock of many smaller public oil and gas exploration and
production companies. As a result of the foregoing, the Company's
Board of Directors may decide to sell the Company's assets and
liquidate the Company, sell the Company's assets and make other
investments or recommend a merger with another company. Complete
liquidation of the Company, under such circumstances, would,
however, probably require a significant time period given the
Company's unresolved litigation, contingent environmental
liabilities and the time necessary to sell the Company's reserves
for the highest available price. Although the Company is currently
seeking acquisitions of oil and gas properties and companies, its
directors may decide to recommend one of these courses of actions
or other restructuring actions given the relatively high prices
currently being paid for oil and gas properties.
The Company spent approximately $120 and devoted significant management
resources to address potential 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
future operations.
-20-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, the Company had hedged 88,000 barrels of crude oil
that it expects to produce from April 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 $19.40 per barrel.
The Company settled hedges for 44,000 barrels for April and May, 2000 delivery
at an average price of $27.68 per barrel resulting in a loss of $357. The
current average settlement price for the 44,000 barrels hedged for June and
July, 2000 is $26.29 per barrel. Accordingly, if the Company settled all of its
crude oil hedges at the current settlement prices, its crude oil sales would
decrease by approximately another $311. 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 88,000 barrels of hedged crude oil production above,
which constitute in excess of 90% 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 its 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.
-21-
<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 March 31, 2000 financial statements included in
Part I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 10.136 - Promissary Note between CEC, Inc. and
Penn Octane Corporation
Exhibit 10.137 - Purchase Agreement between CEC, Inc.
and Penn Octane Corporation, Effective
January 5, 2000
Exhibit 11.1 - Statement re: Computation of Earnings
Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000 CASTLE ENERGY CORPORATION
----------------------
/s/Richard E. Staedtler
-------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-23-
<PAGE>
Control #: 0012-N
NEITHER THIS PROMISSORY NOTE NOR ANY OF THE RIGHTS OR
OBLIGATIONS EVIDENCED HEREBY HAVE BEEN REGISTERED OR QUALIFIED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
THE SECURITIES LAWS OF ANY STATE (THE "STATE LAWS"). NEITHER
THIS PROMISSORY NOTE NOR ANY OF THE RIGHTS OR OBLIGATIONS
EVIDENCED HEREBY MAY BE SOLD, ASSIGNED, TRANSFERRED,
ENCUMBERED OR OTHERWISE DISPOSED OF, IN WHOLE OR IN PART, IN
THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION OR THE
AVAILABILITY OF AN APPLICABLE EXEMPTION FROM THE REGISTRATION
AND QUALIFICATION REQUIREMENTS OF SUCH ACT AND STATE LAWS
EVIDENCED BY AN OPINION OF LEGAL COUNSEL, WHICH OPINION AND
LEGAL COUNSEL ARE SATISFACTORY TO THE BORROWER.
January 5, 2000
PROMISSORY NOTE
---------------
Palm Desert, California
1. General
-------
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
(the "Borrower"), promises to pay to CEC, Inc., a __________________________
(the "Holder"), at the Holder's address set forth in Section 14 of the Purchase
Agreement, dated as of even date herewith (the "Agreement"), between the
Borrower and the Holder, pursuant to which this Promissory Note (the "Note") is
first being issued, or at such other address as the Holder may designate to the
Borrower in writing for such purpose pursuant to Section 14 of the Agreement at
least three Business Days (hereinafter defined) prior to the date fixed for such
payment, the entire principal sum of Five Hundred Thousand Dollars
($500,000.00), together with interest thereon, on the earlier of (i) December
15, 2000, (ii) a date determined by the Borrower within ten (10) Business Days
after the closing of any Financing (as defined in Clause (i)(a) of Recital A to
and Section 10 of the Agreement) in which the net proceeds to the Borrower equal
or exceed the aggregate (the "Aggregate Amount") of the then unpaid principal of
and the then accrued and unpaid interest on the (A) Notes (as defined in the
Agreement) held by the Investors (as defined in the Agreement), (B) notes held
by the New Noteholders (as defined in the Agreement), and (C) Borrower's
obligations to the Additional Fund Providers (as defined in the Agreement), or
(iii) the occurrence of an Event of Default (hereinafter defined) (collectively,
the "Maturity Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing.
1
<PAGE>
In the event of the closing of a Financing in which the net proceeds to
the Company do not equal or exceed the Aggregate Amount, on a date determined by
the Borrower within ten (10) Business Days after such closing, the Borrower
shall apply such net proceeds to prepay the then unpaid principal of and the
then accrued and unpaid interest on the (i) Notes held by the Investors, (ii)
notes held by the New Noteholders, and (iii) Borrower's obligations to the
Additional Fund Providers, pro rata in accordance with the respective then
unpaid principal amounts owed to each.
This Note shall accrue interest on unpaid principal from the date
hereof at the rate of nine percent (9%) per annum, payable on June 15, 2000 and
December 15, 2000 (or the Maturity Date, if earlier). Payment of this Note may
be enforced by suit or other process of law. This Note may be prepaid in whole
or in part at any time prior to maturity without premium or penalty.
All payments hereunder shall be payable in lawful money of the United
States and shall be applied first against accrued and unpaid interest and then
against unpaid principal. Any payments hereunder which otherwise would be due on
a day which is not a Business Day shall instead be made on the next succeeding
day which is a Business Day. For purposes of this Note, the term "Business Day"
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in New York, New York, or in Palm Desert, California, are
authorized by law or regulation to close.
2. Remedies
--------
2.1 Events of Default Defined. The Borrower shall be in default
hereunder upon the occurrence of any of the following events of default ("Events
of Default"): (i) the failure by the Borrower to make any payment when due
hereunder and such failure shall have continued for a period of five (5) days
after delivery by the Holder to the Borrower of written notice of such failure
pursuant to Section 14 of the Agreement; (ii) the commencement by the Borrower
of a voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Borrower a
bankrupt (or the appointment of a receiver or trustee of the Borrower upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit, which appointment is not terminated within sixty (60) days
after the date of such appointment); (iii) the filing of a petition for
reorganization, liquidation or arrangement against the Borrower under the
Federal bankruptcy laws and such petition shall not have been dismissed within
sixty (60) days after it was filed; (iv) the making of a general assignment for
the benefit of its creditors by the Borrower; (v) the existence of any final,
non-appealable judgment on any of the Notes held by the Investors on account of
the nonpayment thereof by the Borrower; or (vi) the breach of any material
representation, warranty or covenant (other than as described in the preceding
clauses (i) through (v)) of the Borrower in the security agreement contemplated
by Section 2.3 below if the Borrower fails to cure such breach within a period
of fifteen (15) days following the delivery by the Holder to the Borrower of
written notice of such breach pursuant to Section 14 of the Agreement.
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2.2 Enforcement Costs. If any payment owing under this Note is not paid
when due, whether at maturity or by acceleration or otherwise, the Borrower
agrees to pay all reasonable costs of collection and such costs shall include,
without limitation, all reasonable costs, attorneys' fees and expenses incurred
by the Holder in connection with any insolvency, bankruptcy, reorganization,
arrangement or similar proceedings involving the Borrower, which in any way
affects the exercise by the Holder of the Holder's rights and remedies under
this Note.
2.3 Future Security. As soon as is reasonably practicable following
Borrower obtaining an ownership interest ("Ownership Interest") in those certain
lease documents identified below (the "Assets"), but subject to the Borrower
first obtaining such Ownership Interest in such Assets, and further subject to
the Borrower first obtaining the related consents contemplated by Section 4(b)
of the Agreement, the Borrower agrees to grant to the Holder (and to the other
Investors in respect of their Notes) a security interest in such Assets to the
extent of such Ownership Interest to secure payment of the obligations evidenced
hereby (and thereby). Such security interests shall be shared on a pari-passu
basis with the security interests which have been or may be granted to all of
the (i) Investors in respect of their Notes, (ii) New Noteholders in respect of
the notes which have been or may be issued to them, and (iii) Additional Fund
Providers in respect of the obligations the Borrower has incurred or may incur
to them, all as contemplated by Section 10 of the Agreement.
The Assets consist of all of the Borrower's interest as lessor
(including all amendments, modifications, extensions and renewals thereof) in
those certain leases obtained in connection with the acquisition of a
co-ownership interest with CPSC International, Inc., a Texas corporation
("CPSC") in two 15-mile pipelines in the County of Cameron, State of Texas, and
two 7-mile pipelines and a transfer terminal in Tamaulipas, Mexico, in each case
constructed or being constructed by CPSC.
2.4 Remedies not Waived. No delay on the part of the Holder in the
exercise of any right or remedy shall operate as a waiver thereto, and no single
or partial exercise by Holder of any right or remedy shall preclude the further
exercise thereof or the exercise of any other right or remedy.
2.5 Other. Except to the extent otherwise contemplated hereby, the
Borrower hereby waives presentment, demand, protest, notice of protest, dishonor
and non-payment of this Note and all notices of every kind and agrees that its
liability hereunder shall be unconditional.
3. Assignability; Binding Effect. The provisions of Section 9 and 15 of
the Agreement are incorporated herein by this reference and made applicable to
this Note.
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4. Severability. Any provision in this Note that is held to be
inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as to
that jurisdiction, be ineffective, unenforceable, void or invalid without
affecting the remaining provisions in any other jurisdiction, and to this end
the provisions of this Note are declared to be severable.
5. Replacement of Note. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Note and (in case of loss, theft or destruction) of an indemnity bond
reasonably satisfactory to it, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Note, if mutilated, the Company will make and deliver to the Holder a new
Note of like tenor in lieu of this Note.
6. Certain Restrictive Covenants. For so long as this Note is
outstanding, the Borrower covenants and agrees that the Borrower will not pay
(i) cash management fees or cash bonuses to its officers or directors other than
cash management fees or cash bonuses which are paid in accordance with past
practices of the Borrower or are provided for in existing employment or other
agreements or are customary for other companies in the Borrower's industry or
are customary for persons having responsibilities similar to those in respect of
which such cash management fees or cash bonuses are paid; or (ii) cash dividends
on its issued and outstanding common stock. The answer to the question of
whether a cash management fee or cash bonus is covered by the restrictions
contained in Section 6(i) of this Note shall be determined solely by the
Borrower, acting in good faith.
7. Captions. The descriptive headings of the various Sections or parts
of this Note are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
8. Governing Law. This Note shall be governed by, and construed in
accordance with, the laws of the State of Delaware without giving effect to such
state's conflicts of law provisions. Each of the parties hereto irrevocably
consents to the jurisdiction and venue of the federal and state courts located
in the State of Delaware.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
Borrower has caused this Note to be executed by its duly authorized officer as
of the date first above written.
PENN OCTANE CORPORATION
By:___________________________________
Ian T. Bothwell, Vice President and
Chief Financial Officer
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Control #: 0012-P
PURCHASE AGREEMENT
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THIS PURCHASE AGREEMENT (the "Agreement") is made and entered into as
of the 5th day of January, 2000, by and between Penn Octane Corporation, a
Delaware corporation (the "Company"), and the investor whose name and address
appears on the signature page hereto (the "Purchaser"), with reference to the
following facts:
RECITALS:
--------
A. On or about December 10, 1999, the Company, acting through
Pennsylvania Merchant Group as placement agent for the Company ("PMG"),
commenced a private offering (the "Offering"), solely to qualified investors
(including the Purchaser, the "Investors") who are "accredited investors" within
the meaning of Rule 501(a) of Regulation D promulgated by the Commission
(hereinafter defined) under the Securities Act (hereinafter defined), for up to
$5,000,000, of (i) 9% Promissory Notes in the aggregate principal amount of up
to $5,000,000, due the earlier of (a) the closing after the date hereof of any
single financing transaction by the Company involving the issuance by the
Company of debt or equity securities of the Company resulting in net proceeds to
the Company in excess of $250,000 (subject to the provisions of Section 10
hereof, a "Financing"), or (b) December 15, 2000, substantially in the form of
Exhibit 1 hereto (the "Notes"), and (ii) warrants (the "Warrants") to purchase
up to 625,000 shares (subject to adjustment as provided therein) (the "Warrant
Shares") of the Common Stock, $.01 par value (the "Common Stock"), of the
Company, exercisable until December 15, 2002 (unless earlier called as provided
therein) at a purchase price of $4.00 per Warrant Share (subject to adjustment
as provided for therein), pursuant to a Common Stock Purchase Warrant
substantially in the form of Exhibit 2 hereto (the Notes and the Warrants being
herein collectively referred to as the "Securities").
B. Under the terms of the Offering, Investors who submit the
appropriate subscription form (the "Subscription Form") for their investment in
the Securities on or before December 17, 1999, and whose funds are received by
Summit Bank as escrow agent (the "Escrow Agent") on or before the close of
business on December 20, 1999, will receive Warrants (as aforesaid) at the rate
of Warrants covering 125 Warrant Shares for each $1,000 face amount of Notes
purchased (and each of the other Investors will receive Warrants (as aforesaid)
at the rate of Warrants covering 62.5 Warrant Shares for each $1,000 face amount
of Notes purchased by such Investor, plus Warrants at the rate of an additional
62.5 Warrant Shares per $1,000 of face amount of Notes purchased by such
Investor if the principal amount of the Note purchased by such Investor
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and all accrued and unpaid interest thereon is not paid in full on or before the
90th day following the date of such Investor's Note).
C. If the Offering is consummated, the Company and each of the
Investors will also enter into a Registration Rights Agreement with respect to
the Warrant Shares covered by his Warrants, substantially in the form of Exhibit
3 hereto (the "Registration Rights Agreement").
D. It is contemplated that the Company and each of the Investors will
enter into a Purchase Agreement similar to this Agreement.
E. This Agreement is the document pursuant to which the Purchaser is
acquiring his Securities from the Company.
F. THE PURCHASER IS AWARE AND ACKNOWLEDGES AND AGREES THAT THE
PROVISIONS OF THIS AGREEMENT AND OF THE NOTE AND WARRANTS HE IS ACQUIRING AND OF
THE REGISTRATION RIGHTS AGREEMENT HE IS ENTERING INTO WITH THE COMPANY DIFFER IN
CERTAIN RESPECTS FROM, AND SUPERSEDE AND REPLACE IN THEIR ENTIRETY, ANY AND ALL
PRIOR AGREEMENTS OR UNDERSTANDINGS PERTAINING TO THE SUBJECT MATTER HEREOF AND
THEREOF (ORAL OR WRITTEN), INCLUDING, WITHOUT LIMITATION, THE PROVISIONS OF THAT
CERTAIN TERM SHEET FOR A BRIDGE LOAN PENN OCTANE CORPORATION SERIES A
SUBORDINATED NOTES DATED DECEMBER 10, 1999 AND AMENDMENT NO. 1 THERETO, DATED
DECEMBER 17, 1999, COPIES OF WHICH ARE ATTACHED HERETO AS EXHIBIT 4); AND
APPROVES OF AND CONSENTS AND AGREES TO THE FOREGOING.
NOW, THEREFORE, in consideration of the agreements and obligations
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Company
hereby agree as follows:
1. Purchase and Sale of the Purchaser Securities. Subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
Purchaser, and the Purchaser agrees to purchase from the Company, Securities
comprised of a Note in the principal amount of $500,000.00 and Warrants
exercisable for the purchase of up to 62,500 Warrant Shares (collectively, the
"Purchaser Securities"), for a purchase price of $500,000.00 (the "Purchase
Price").
2. The Closing. The closing (the "Closing") of the purchase and sale of
the Purchaser Securities shall take place at such time(s) and place(s), and in
such manner(s), as the Company and PMG (hereinafter defined) shall agree. At or
prior to the Closing, the Purchaser shall deliver the Subscription Form to PMG
and deliver to the Company the full Purchase Price for the Purchaser
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Securities in immediately available funds, the Company shall deliver to the
Purchaser the Note and the Warrants included in the Purchaser Securities, and
the Purchaser and the Company shall execute and deliver the Registration Rights
Agreement.
3. Registration Rights. The Purchaser shall have such registration
rights with respect to the Warrant Shares covered by the Warrants included in
the Purchaser Securities as are set forth in the Registration Rights Agreement.
4. Representations and Warranties of the Company. As of the Closing,
the Company represents and warrants as follows:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and has the
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder.
(b) The execution, delivery and performance of this Agreement, and
the sale and delivery of the Purchaser Securities to the Purchaser have been
duly authorized by all necessary corporate action on the part of the Company
and, subject to the qualification that certain consents are required of existing
secured lenders of the Company before the Company can grant the security
interest contemplated by Section 2.3 of the Note included in the Purchaser
Securities, which consents the Company believes, but can provide no absolute
assurance, that it will be able to obtain, do not violate any material covenant
contained in any agreement to which the Company is a party.
(c) The Warrant Shares covered by the Warrants included in the
Purchaser Securities, when issued upon exercise of such Warrants and receipt by
the Company of full payment therefor, will be duly and validly issued, fully
paid and nonassessable.
(d) Subject to the truth and accuracy of the Purchaser's
representations set forth in Section 5 of this Agreement and the truth and
accuracy of the representations of PMG contemplated by Section 7 of this
Agreement, the offer, sale and issuance of the Purchaser Securities as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act").
(e) The net proceeds received by the Company from the sale of the
Purchaser Securities shall be used by the Company to acquire an Ownership
Interest in Assets (as such terms are defined in Section 2.3 of the Note
included in the Purchaser Securities) and/or for working capital purposes.
(f) All reports, registrations, documents, statements and other
filings required to be made by the Company with the Securities and Exchange
Commission (the "Commission") within the past twelve months have been timely
filed, and none of such materials contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
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necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
5. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants as follows:
(a) General:
(i) The Purchaser has all requisite authority to enter into this
Agreement and to perform all of the obligations required to be performed by the
Purchaser hereunder.
(ii) Neither the Company nor any person acting on behalf of the
Company has offered or sold the Purchaser Securities to the Purchaser by means
of any form of general solicitation or general advertising. The Purchaser has
not received, paid or given, directly or indirectly, any commission or
remuneration for or on account of any sale, or the solicitation of any sale, of
the Purchaser Securities.
(b) Information Concerning the Company:
(i) The Purchaser has had full access to all reports,
registrations, documents, statements and other filings heretofore made by the
Company with the Commission under the Securities Act, the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated by the
Commission thereunder. The Purchaser is thoroughly familiar with the business
and financial condition, properties, operations and prospects of the Company.
(ii) The Purchaser has been given full access to all information
requested by the Purchaser concerning the business and financial condition,
properties, operations and prospects of the Company. The Purchaser and his
advisors (if any) have had an opportunity to ask questions of, and to receive
information from, the Company and persons acting on its behalf concerning the
terms and conditions of the Purchaser's investment in the Purchaser Securities,
and to obtain any additional information necessary to verify the accuracy of the
information and data received by the Purchaser. The Purchaser is satisfied that
there is no material information concerning the business and financial
condition, properties, operations or prospects of the Company of which Purchaser
is unaware.
(iii) The Purchaser has made, either alone or together with his
advisors (if any), such independent investigation of the Company, its
management, and related matters as the Purchaser deems to be, or the Purchaser's
advisors (if any) have advised to be, necessary or advisable in connection with
the Purchaser's investment in the Purchaser Securities; and the Purchaser and
his advisors (if any) have received all information and data which the Purchaser
and his advisors (if any) believe to be necessary in order to reach an informed
decision as to the advisability of investing in the Purchaser Securities.
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(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the Purchaser
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Note or the Warrants included in the
Purchaser Securities and that resale of such Note, such Warrants and the Warrant
Shares issuable upon exercise of such Warrants will be restricted as herein
provided.
(c) Status of Purchaser:
(i) The Purchaser is an "accredited investor" within the meaning
of Rule 501 of Regulation D promulgated by the Commission under the Securities
Act; and the Purchaser either alone or with the Purchaser's advisors (if any)
has such knowledge, skill and experience in business, financial and investment
matters as to be capable of evaluating the merits and risks of an investment in
the Purchaser Securities. To the extent that the Purchaser has deemed it
appropriate to do so, the Purchaser has retained at the Purchaser's own expense,
and relied upon, appropriate professional advice regarding the investment, tax
and legal merits and consequences of this Agreement and his investment in the
Purchaser Securities.
(d) Restrictions on Transfer or Sale:
(i) The Purchaser is acquiring the Purchaser Securities and any
Warrant Shares purchased upon exercise of the Warrants included in the Purchaser
Securities solely for his own account, for investment purposes, and not with a
view to, or for resale in connection with, any distribution of the Purchaser
Securities or such Warrant Shares. The Purchaser understands that neither such
Purchaser Securities nor such Warrant Shares have been registered or qualified
under the Securities Act, or the securities laws of any state (collectively, the
"State Securities Laws"), by reason of specific exemptions under the provisions
thereof which depend in part upon the investment intent of the Purchaser and
upon the accuracy of all of the representations and warranties made by the
Purchaser in this Agreement. The Purchaser understands that the Company is
relying upon the representations and agreements of the Purchaser contained in
this Agreement for the purpose of determining whether this transaction meets the
requirements for such exemptions.
(ii) The Purchaser understands that the Purchaser Securities and
any Warrant Shares acquired upon exercise of the Warrants included therein are
"restricted securities" under applicable federal securities laws and that the
Securities Act and the rules and regulations of the Commission provide in
substance that the Purchaser may dispose of such securities or any of them only
pursuant to an effective registration statement under the Securities Act and
applicable State Securities Laws or an exemption therefrom, and understands that
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the Company has no obligations or intentions to register or qualify any of such
securities thereunder, or to take any other action so as to permit sales
pursuant to the Securities Act and applicable State Securities Laws, except as
set forth in the Registration Rights Agreement. Accordingly, the Purchaser
understands that under the Commission's rules and regulations and applicable
State Securities Laws, unless disposed of pursuant to an effective registration
statement under the Securities Act and an effective registration or
qualification under applicable State Securities Laws, the Purchaser may dispose
of the Purchaser Securities and any Warrant Shares acquired upon exercise of the
Warrants included therein only in accordance with the provisions of Rule 144
promulgated by the Commission under the Securities Act, to the extent available,
or in "private placements" which are exempt from registration or qualification
under the Securities Act and applicable State Securities Laws, in which event
the transferee will acquire "restricted securities" subject to the same
limitations as in the hands of the Purchaser. As a consequence, absent such an
effective registration or qualification under the Securities Act and applicable
State Securities Laws, the Purchaser understands that it may be required to bear
the economic risks of the investment in the Purchaser Securities (and such
Warrant Shares) for an indefinite period of time.
(iii) The Purchaser agrees that (a) the Purchaser will not sell,
transfer, encumber or otherwise dispose of the Purchaser Securities or any
Warrant Shares acquired upon exercise of the Warrants included therein or any
interest in any thereof or therein, or make any offer or attempt to do any of
the foregoing, except pursuant to an effective registration and qualification
under the Securities Act and applicable State Securities Laws or in a
transaction which, in the opinion of counsel satisfactory to the Company (which
requirement may be waived by the Company upon advice of counsel), is exempt from
the registration and qualification requirements of the Securities Act and
applicable State Securities Laws; (b) the Purchaser Securities and any
certificate(s) representing Warrant Shares issued upon exercise of the Warrants
included therein will bear a legend making reference to the foregoing
restrictions; and (c) the Company and any transfer agent for the Company shall
not be required to give effect to any purported transfer of any of such
securities except upon compliance with the foregoing restrictions.
(iv) The registration rights granted to the Purchaser in the
Registration Rights Agreement are not assignable or otherwise transferrable by
the Purchaser. In no event shall any sale, assignment, pledge or transfer of the
Warrants included in the Purchaser Securities or Warrant Shares issuable upon
exercise of the Warrants included therein by the Purchaser to a transferee give
rise to rights of any such transferee under the Registration Rights Agreement.
(e) Documents. The Purchaser has carefully read, and understands and
agrees to be bound by, all of the provisions of this Agreement, the Note and the
Warrants included in the Purchaser Securities and the Registration Rights
Agreement.
6. Conditions to Obligations of Purchaser and the Company. The
obligations of the Purchaser to purchase and pay for the Purchaser Securities
and of the Company to sell and deliver such Purchaser Securities are subject to
the satisfaction at or prior to the Closing of the following conditions
precedent:
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(a) The representations and warranties of the Company contained in
Section 4 hereof and of the Purchaser contained in Section 5 hereof shall be
true and correct on and as of the Closing in all respects with the same effect
as though representations and warranties had been made on and as of the Closing.
(b) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement, and the Company shall have executed
and delivered to the Purchaser the Note and the Warrants included in the
Purchaser Securities.
(c) The Company and the Purchaser shall each have executed and
delivered this Agreement, and the Purchaser shall have delivered to the Company
(as contemplated hereby) the full Purchase Price for the Purchaser Securities.
7. Fee. In connection with the purchase and sale of the Securities
(including the Purchaser Securities), PMG, in consideration of acting as
placement agent for the Company in connection with the Offering and of certain
other services (the "Other Services") rendered or to be by PMG to the Company in
connection therewith, shall receive a fee from the Company equal to 7% of the
Purchase Price of all of the Notes sold in the Offering, and be entitled to
reimbursement by the Company for PMG's out-of-pocket expenses (including
reasonable attorneys fees) associated with the Offering and the Other Services
in an amount not to exceed a total of $15,000. In addition, PMG shall be
entitled to receive warrants to purchase shares of Common Stock of the Company
at the rate of warrants for 25,000 shares of Common Stock of the Company for
every $1,000,000 principal amount of Notes issued by the Company through PMG in
the Offering. Such warrants will be exercisable until December 15, 2002, at an
exercise price of $4.00 per share, and contain other rights and restrictions
largely comparable to those contained in the Warrants; and the warrant shares
covered by such warrants will have registration rights comparable to those
provided for in the Registration Rights Agreement. The Company's obligation to
pay the foregoing to PMG shall be contingent upon the Company's prior receipt
from PMG of a representation letter, reasonably satisfactory to the Company, in
which, among other things, PMG (i) provides representations comparable to those
set forth in Section 5 hereof, (ii) represents that the Offering, and all of
PMG's activities in connection therewith, and the consideration to be received
by PMG as contemplated by this Section 7, in each case comply with all
applicable federal and state securities laws and National Association of
Securities Dealers, Inc. rules in connection with the Offering, and (iii)
represents and covenants that it has, on behalf of the Company, timely made (and
will continue to timely make) all filings required to be made by the Company in
order to make the Offering exempt from the registration and qualification
requirements of all applicable federal and state securities laws, and that such
filings comply (and will comply) with the applicable requirements of all such
laws.
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8. Waiver, Amendment. Neither this Agreement nor any provisions hereof
shall be modified, changed, discharged or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
9. Assignability. The Purchaser shall not assign or otherwise transfer
this Agreement, any of the Purchaser Securities (or any of the Warrant Shares
issuable upon exercise of the Warrants included therein), or the Registration
Rights Agreement, any interest in the foregoing, or any of his rights or
obligations thereunder, without the prior written consent of the Company.
10. Definition of Financing. For purposes of this Agreement and the
Note included in the Purchaser Securities, the term "Financing" shall have the
meaning stated in clause (i)(a) of Recital A to this Agreement, except that all
of the following (and all of the proceeds thereof) are hereby expressly excluded
from such definition: (a) transactions in the ordinary course of the Company's
and its subsidiaries' business; (b) purchase money and lease transactions
entered into by the Company or its subsidiaries; (c) transactions entered into
by the Company or its subsidiaries on or before December 17, 1999, transactions
entered into in furtherance thereof and amendments to the foregoing; (d) the
Offering, the Notes and Warrants issued in connection with the Offering, the
warrants issued to PMG as contemplated by Section 7 hereof and the proceeds
received upon exercise of such Warrants and warrants; (e) options or warrants
heretofore or hereafter issued to employees or independent contractors of or
advisors to the Company or its subsidiaries and the proceeds received upon
exercise thereof; (f) up to $1,075,000 which has been or may be received by the
Company in connection with the issuance by the Company of notes and warrants to
third parties (the "New Noteholders") pursuant to terms and conditions similar
to those contained in this Agreement, the Notes, the Warrants and the
Registration Rights Agreement (which New Noteholders, the Purchaser agrees,
shall, with respect to repayment of the obligations owing to them under their
notes, be entitled to participate with the Purchaser and the other Investors, on
a pari-passu basis with the Purchaser and such other Investors, in the security
interest contemplated by Section 2.3 of the Note to secure repayment of the
obligations owing to such New Noteholders under their notes, and in order and
priority of payment) and the proceeds received upon exercise of such warrants;
(g) any other future financing transaction(s) hereafter entered into by the
Company with third parties (the "Additional Fund Providers"), on any terms,
which results in aggregate net proceeds to the Company of up to $2,000,000
(which additional Fund Providers, the Purchaser agrees, shall also, with respect
to repayment of the obligations owing to them, be entitled to participate with
the Purchaser and the other Investors, on a pari-passu basis with the Purchaser
and the other Investors, in the security interest contemplated by Section 2.3 of
the Note to secure repayment of any obligations owing to such Additional Fund
Providers, and in order and priority of payment) and the proceeds received upon
the exercise or conversion of any options, warrants or convertible securities
included in such transaction(s); and (g) any other transaction(s) approved
either by PMG or by a majority in interest (determined by reference to the then
unpaid principal amounts of their then respective Notes) of the Purchaser and
the other Investors as being excluded from the definition of "Financing". The
answer to the question of whether any transaction is excluded from the
definition of a "Financing" pursuant to the preceding provisions of this Section
10 shall be determined solely by the Company, acting in good faith.
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11. Applicable Law. This Agreement shall be governed by and construed
in accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflicts of law.
12. Section and Other Headings; Gender. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement. For purposes of this Agreement,
all references to the singular shall also be deemed to refer to the plural, all
references to the masculine shall be deemed to refer to the feminine and neuter,
and, in each case, vice versa.
13. Counterparts. This Agreement may be executed in two or more
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
14. Notices. All notices and other communications provided for herein
or permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or by Federal Express or similar means or by
facsimile (with proof of receipt) or sent by registered or certified mail,
return receipt requested, postage prepaid (provided, however, that notices shall
not be deemed delivered until actually received at the address to which they
were properly sent):
(a) If to the Company, at the following address:
Penn Octane Corporation
77-530 Enfield Lane, Bldg. D
Palm Desert, California 92211
Fax No. (760) 772-8588
Attn: Jerome B. Richter, President
(b) If to the Purchaser, at the following address:
CEC, Inc.
300 Delaware Avenue, Suite 900
Wilmington, DE 19801
Phone: (610) 995-9400 Fax: (610) 995-0409
Attn: CEC, Inc.
or at such other address as either party shall have specified by notice in
writing to the other.
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15. Binding Effect. The provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
16. Integration. THE PURCHASER IS AWARE AND ACKNOWLEDGES AND AGREES
THAT THE PROVISIONS OF THIS AGREEMENT AND OF THE NOTE AND WARRANTS INCLUDED IN
THE PURCHASER SECURITIES HE IS ACQUIRING AND OF THE REGISTRATION RIGHTS
AGREEMENT DIFFER IN CERTAIN RESPECTS FROM, AND SUPERSEDE AND REPLACE IN THEIR
ENTIRETY, ANY AND ALL PRIOR AGREEMENTS OR UNDERSTANDINGS PERTAINING TO THE
SUBJECT MATTER HEREOF AND THEREOF (ORAL OR WRITTEN, AND INCLUDING, WITHOUT
LIMITATION, THE PROVISIONS OF THAT CERTAIN TERM SHEET FOR A BRIDGE LOAN PENN
OCTANE CORPORATION DATED DECEMBER 10, 1999, AND AMENDMENT NO. 1 THERETO, DATED
DECEMBER 17, 1999, COPIES OF WHICH ARE ATTACHED HERETO AS EXHIBIT 4); AND
APPROVES OF AND CONSENTS TO THE FOREGOING.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PURCHASER:
----------
CEC, Inc.
By: /s/Richard E. Staedtler
------------------------
Name: Richard E. Staedtler
Title: Chief Financial Officer
PENN OCTANE CORPORATION
By: /s/Ian T. Bothwell
-------------------
Name: Ian T. Bothwell
Title: Vice President and Chief Financial
Officer
10
<PAGE>
Exhibit 11.1
(1 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------
2000 1999
-------------------------- -------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. Shares Outstanding, Net of Treasury
Stock Purchased During the Period:
Stock, net 7,012,887 7,012,887 8,822,187 8,822,187
Purchase of treasury stock (weighted) (337,488) (337,488)
----------- ----------- ----------- -----------
7,012,887 7,012,887 8,484,699 8,484,699
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 131,202
----------- ----------- ----------- -----------
III. Weighted Average Shares and Equivalent Shares 7,012,887 7,012,887 8,484,699 8,615,901
=========== =========== =========== ===========
IV. Net Income (Loss) ($ 277) ($ 277) $ 3,938 $ 3,938
=========== =========== =========== ===========
V. Net Income (Loss) Per Share ($ .04) ($ .04) $ .46 $ .46
=========== =========== =========== ===========
</TABLE>
<PAGE>
Exhibit 11.1
(2 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-------------------------------------------------------
2000 1999
-------------------------- -------------------------
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) (568,854) (568,854) (167,424) (167,424)
----------- ----------- ----------- -----------
7,070,433 7,070,433 8,654,763 8,654,763
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 153,609
----------- ----------- ----------- -----------
III. Weighted Average Shares and Equivalent Shares 7,070,433 7,070,433 8,654,763 8,808,372
=========== =========== ========== =========
IV. Net Income (Loss) ($ 18) ($ 18) $ 6,449 $ 3,938
=========== =========== ========== =========
V. Net Income (Loss) Per Share ($ .00) ($ .00) $ .75 $ .73
=========== =========== ========== =========
</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 March 31, 2000 included
in Part I Financial information and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 11,281,000
<SECURITIES> 10,077,000
<RECEIVABLES> 3,911,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,039,000
<PP&E> 41,705,000
<DEPRECIATION> 9,372,000
<TOTAL-ASSETS> 61,372,000
<CURRENT-LIABILITIES> 6,368,000
<BONDS> 0
0
0
<COMMON> 5,752,000
<OTHER-SE> 49,252,000
<TOTAL-LIABILITY-AND-EQUITY> 61,372,000
<SALES> 3,503,000
<TOTAL-REVENUES> 3,503,000
<CGS> 0
<TOTAL-COSTS> 3,890,000
<OTHER-EXPENSES> 90,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (282,000)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (277,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277,000)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
