-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iq0QMBmclmgbdMumPhX2MbiHYgxAczIy/VFejA7zGHUk+rpizEvFBz7zeA2M5qNT RzpEe91kwMn34DJDOzULOw== 0000950116-01-000208.txt : 20010214 0000950116-01-000208.hdr.sgml : 20010214 ACCESSION NUMBER: 0000950116-01-000208 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE ENERGY CORP CENTRAL INDEX KEY: 0000709355 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760035225 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10990 FILM NUMBER: 1537466 BUSINESS ADDRESS: STREET 1: ONE RADNOR CORPORATE CTR STE 250 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6109959400 MAIL ADDRESS: STREET 1: ONE RADNOR CORPORATE CENTER SUITE 250 STREET 2: 100 MATSONFORD CITY: RADNOR STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN OIL & GAS INC/NEW DATE OF NAME CHANGE: 19861117 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN HOLDING CO DATE OF NAME CHANGE: 19830310 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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)
Delaware 76-0035225 - ------------------------------------------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) One Radnor Corporate Center, Suite 250, 100 Matsonford Road, Radnor, Pennsylvania 19087 - ------------------------------------------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (610) 995-9400 -----------------------------------------------------
- -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes _X_ No___. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 6,632,884 shares of Common Stock, $.50 par value, outstanding as of February 5, 2001. CASTLE ENERGY CORPORATION INDEX Page # ------ Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - December 31, 2000 (Unaudited) and September 30, 2000.......................... 2 Consolidated Statements of Operations - Three Months Ended December 31, 2000 and 1999 (Unaudited)...................... 3 Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 2000 and 1999 (Unaudited)... 4 Consolidated Statements of Stockholders' Equity and Other Comprehensive Income - Year Ended September 30, 2000 and Three Months Ended December 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................................... 11 Item 3. Qualitative and Quantitative Disclosures About Market Risk.. 14 Part II. Other Information Item 1. Legal Proceedings........................................... 15 Item 6. Exhibits and Reports on Form 8-K............................ 15 Signature ................................................................... 16 The accompanying notes are an integral part of these financial statements -1- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CASTLE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ("$000's" Omitted Except Share Amounts)
December 31, September 30, 2000 2000 ------------ ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents................................................... $ 11,597 $ 11,525 Restricted cash............................................................. 1,764 1,742 Accounts receivable......................................................... 3,881 3,758 Marketable securities....................................................... 7,792 10,985 Prepaid expenses and other current assets................................... 325 251 Estimated realizable value of discontinued net refining assets.............. 800 800 Deferred income taxes....................................................... 1,665 2,256 --------- -------- Total current assets...................................................... 27,824 31,317 Property, plant and equipment, net: Natural gas transmission.................................................... 54 55 Furniture, fixtures and equipment........................................... 224 258 Oil and gas properties, net (full cost method): Proved properties......................................................... 29,417 29,218 Unproved properties not being amortized................................... 1,688 1,447 Investment in Networked Energy LLC.............................................. 484 500 Note receivable - Penn Octane Corporation....................................... 500 500 --------- -------- Total assets.............................................................. $ 60,191 $ 63,295 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Dividend payable............................................................ $ 329 $ 333 Accounts payable............................................................ 1,873 2,433 Accrued expenses............................................................ 511 265 Accrued taxes on appreciation of marketable securities.................... 1,478 2,628 Stock subscription payable................................................ 75 150 Net refining liabilities retained......................................... 3,204 3,204 --------- -------- Total current liabilities................................................. 7,470 9,013 Long-term liabilities........................................................... 7 6 --------- -------- Total liabilities......................................................... 7,477 9,019 --------- -------- 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 shares issued at December 31, 2000 and September 30, 2000...................................................................... 5,752 5,752 Additional paid-in capital.................................................. 67,365 67,365 Accumulated other comprehensive income - unrealized gains on marketable securities, net of taxes....................................... 2,628 4,671 Retained earnings........................................................... 43,203 42,422 --------- -------- 118,948 120,210 Treasury stock at cost - 4,831,020 shares at December 31, 2000 and 4,791,020 shares at September 30, 1999.................................... (66,234) (65,934) --------- -------- Total stockholders' equity................................................ 52,714 54,276 --------- -------- Total liabilities and stockholders' equity................................ $ 60,191 $ 63,295 ========= ========
The accompanying notes are an integral part of these financial statements -2- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("$000's" Omitted Except Share Amounts) (Unaudited)
Three Months Ended December 31, 2000 1999 --------- ----------- Revenues: Oil and gas sales.................................................. $ 5,394 $ 4,085 --------- ----------- Expenses: Oil and gas production............................................. 1,404 1,375 General and administrative......................................... 1,758 1,406 Depreciation, depletion and amortization........................... 699 1,272 --------- ----------- 3,861 4,053 --------- ----------- Operating income....................................................... 1,533 32 --------- ----------- Other income: Interest income.................................................... 212 199 Other income (expense)............................................. 6 33 Equity in loss of Networked Energy LLC............................. (16) --------- ----------- 202 232 --------- ----------- Income before provision for income taxes............................... 1,735 264 --------- ----------- Provision for income taxes: State.............................................................. 17 Federal............................................................ 608 5 --------- ----------- 625 5 --------- ----------- Net income............................................................. $ 1,110 $ 259 ========= =========== Net income per share: Basic.............................................................. $ .17 $ .04 ========= =========== Diluted............................................................ $ .16 $ .04 ========= =========== Weighted average number of common and potential dilutive common shares outstanding: Basic.............................................................. 6,680,404 7,127,739 ========= =========== Diluted............................................................ 6,899,633 7,247,832 ========= ===========
The accompanying notes are an integral part of these financial statements -3- CASTLE ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ("$000's" Omitted Except Share Amounts) (Unaudited)
Three Months Ended December 31, 2000 1999 --------- --------- Net cash flow provided by operating activities......................... $ 1,809 $ 173 --------- --------- Cash flows from investing activities: Sale of oil and gas properties.................................. 40 Investment in oil and gas properties............................ (1,144) (6,095) Investment in furniture, fixtures and equipment................. (22) --------- --------- Net cash (used in) investing activities....................... (1,104) (6,117) --------- --------- Cash flows from financing activities: Dividends paid to stockholders................................ (333) (368) Acquisition of treasury stock................................. (300) (3,551) --------- --------- Net cash (used in) financing activities....................... (633) (3,919) --------- --------- Net increase (decrease) in cash and cash equivalents................... 72 (9,863) Cash and cash equivalents - beginning of period........................ 11,525 22,252 --------- --------- Cash and cash equivalents - end of period.............................. $ 11,597 $ 12,389 ========= =========
The accompanying notes are an integral part of these financial statements -4- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME ("$000's" Omitted Except Share Amounts)
Year Ended September 30, 2000 and Three Months Ended December 31,2000 (Unaudited) Accumulated Common Stock Additional Other Retained ---------------------- Paid-In Comprehensive Comprehensive Earnings Shares Amount Capital Income Income (Deficit) ------ ------ ---------- ------------- ------------- ---------- Balance - October 1, 1999................ 6,828,646 3,414 67,365 2,396 41,054 Stock split retroactively applied ....... 4,675,258 2,338 (2,338) ---------- ------ ------- ----- ------- Balance-September 30, 1999 - restated 11,503,904 5,752 67,365 2,396 38,716 Stock acquired........................... Dividends declared ($.20 per share) ..... (1,363) Comprehensive income..................... Net income............................. $ 5,069 5,069 Other comprehensive income: Unrealized gain on marketable securities, net of tax............ 2,275 2,275 ------- $ 7,344 ---------- ------ ------- ======= ------ ------- Balance - September 30, 2000............. 11,503,904 $5,752 $67,365 $4,671 $42,422 Stock acquired........................... Dividends declared ($.05 per share) (329) Comprehensive income: Net income............................. $ 1,110 1,110 Other comprehensive income: Unrealized (loss) on marketable securities, net of tax............ (2,043) (2,043) ------- ($ 933) ---------- ------ ------- ======= ------ ------- Balance - December 31, 2000.............. 11,503,904 $5,752 $67,365 $2,628 $43,203 ========== ====== ======= ====== =======
Treasury Stock ------------------------ Shares Amount Total ---------- ---------- ------- Balance - October 1, 1999................ 4,282,217 (60,726) 53,503 Stock split retroactively applied ....... --------- ------ ------ Balance-September 30, 1999 - restated 4,282,217 (60,726) 53,503 Stock acquired........................... 508,803 (5,208) (5,208) Dividends declared ($.20 per share) ..... (1,363) Comprehensive income..................... Net income............................. 5,069 Other comprehensive income: Unrealized gain on marketable securities, net of tax............ 2,275 --------- ------- ------- Balance - September 30, 2000............. 4,791,020 ($65,934) $54,276 Stock acquired........................... 40,000 (300) (300) Dividends declared ($.05 per share) (329) Comprehensive income: Net income............................. 1,110 Other comprehensive income: Unrealized (loss) on marketable securities, net of tax............ (2,043) --------- ------- ------- Balance - December 31, 2000.............. 4,831,020 ($66,234) $52,714 ========= ======= =======
The accompanying notes are an integral part of these financial statements. -5- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements ("$000's" Omitted 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 period ended December 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2001 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, 2000. In the opinion of the Company, the unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the three-month periods ended December 31, 2000 and 1999 and for a fair statement of financial position at December 31, 2000. Note 2 - September 30, 2000 Balance Sheet The amounts presented in the balance sheet as of September 30, 2000 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, 2000. 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 of the refining assets sold by Powerine and is no longer a subsidiary of the Company. The Company's remaining refining subsidiaries own no refining assets, have been inactive for over five years, and are inactive and in the process of liquidation. As a result, the Company has accounted for its refining operations as discontinued operations. Such discontinued refining operations have not impacted the Company's operations since September 30, 1995, although they may impact the Company's future operations. Note 4 - Contingencies/Litigation Contingent Environmental Liabilities In December 1995, Indian Refining Limited Partnership ("IRLP"), an inactive subsidiary of the Company, sold its refinery, the Indian Refinery, to American Western Refining Limited Partnership ("American Western"), an unaffiliated party. As part of the related purchase and sale agreement, American Western assumed all environmental liabilities and indemnified IRLP with respect thereto. Subsequently, American Western filed for bankruptcy and sold the Indian Refinery to an outside party pursuant to a bankruptcy proceeding. The new owner is currently dismantling the Indian Refinery. During fiscal 1998, the Company was informed that the United States Environmental Protection Agency ("EPA") had investigated offsite acid sludge waste found near the Indian Refinery and was also investigating and remediating surface contamination in the Indian Refinery property. Neither the Company nor IRLP was initially named with respect to these two actions. -6- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements ("$000's" Omitted Except Share Amounts) (Unaudited) In October 1998, the EPA named the Company and two of its refining subsidiaries as potentially responsible parties for the expected clean-up of the Indian Refinery. In addition, eighteen other parties were named including Texaco Refining and Marketing, Inc. ("Texaco"), the refinery operator for over 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. On August 7, 2000, the Company received notice of a claim against it and two of its inactive refining subsidiaries from Texaco and its parent. In its claim, Texaco demanded that the Company and its former subsidiaries indemnify Texaco for all liability resulting from environmental contamination at and around the Indian Refinery. In addition, Texaco demanded that the Company assume Texaco's defense in all matters relating to environmental contamination at and around the Indian Refinery, including lawsuits, claims and administrative actions initiated by the EPA and indemnify Texaco for costs that Texaco has already incurred addressing environmental contamination at the Indian Refinery. Finally, Texaco also claimed that the Company and two of its inactive subsidiaries are liable to Texaco under the Federal Comprehensive Environmental Response Compensation and Liability Act as owners and operators of the Indian Refinery. The Company responded to Texaco disputing the factual and theoretical basis for Texaco's claims against the Company. The Company and its special counsel believe that Texaco's claims are utterly without merit and the Company intends to vigorously defend itself against Texaco's claims and any lawsuits that may follow. In September 1995, Powerine sold the Powerine Refinery to Kenyen Resources ("Kenyen"), an unaffiliated party. In January 1996, Powerine merged into a subsidiary of Energy Merchant Corp. ("EMC"), an unaffiliated party, and EMC assumed all environmental liabilities. In August 1998, EMC sold the Powerine Refinery to a third 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 summons based upon lack of jurisdiction and the Company is no longer involved in the case. Although the environmental liabilities related to the Indian Refinery and Powerine Refinery have been transferred to others, there can be no assurance that the parties assuming such liabilities will be able to pay them. American Western, owner of the Indian Refinery, filed for bankruptcy and is in the process of liquidation. EMC, which assumed the environmental liabilities of Powerine, sold the Powerine Refinery to an unrelated party, which we understand is still seeking financing to restart that refinery. Furthermore, as noted above, the EPA named the Company as a potentially responsible party for remediation of the Indian Refinery and has requested and received relevant information from the Company. Estimated gross undiscounted clean up costs for this refinery are $80,000 - $150,000 according to third parties. If the Company were found liable for the remediation of the Indian Refinery, it could be required to pay a percentage of the clean-up costs. Since the Company's subsidiary only operated the Indian Refinery five years, whereas Texaco and others operated it over fifty years, the Company would expect that its share of remediation liability would be proportional to its years of operation, although such may not be the case. 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 these former and/or present owners, it is possible that the Company and/or one 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 is ultimately held liable in such a circumstance, should litigation involving the Company and/or IRLP occur, the Company would probably incur substantial legal fees and experience a diversion of management resources from other operations. -7- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements ("$000's" Omitted Except Share Amounts) (Unaudited) Although the Company does not believe it is liable for any of its subsidiaries' clean-up costs and intends to vigorously defend itself in such regard, the Company cannot predict the ultimate outcome of these matters due to inherent uncertainties. Litigation Long Trusts Lawsuit In November 2000, the Company and three of its subsidiaries were defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case, the Long Trusts, are non-operating working interest owners in wells previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an inactive exploration and production subsidiary of the Company. The wells were among those sold to Union Pacific Resources Corporation ("UPRC") in May 1997. The Long Trusts claimed that CTPLP did not allow them to sell gas from March 1, 1996 to January 31, 1997 as required by applicable joint operating agreements, and they sued CTPLP and the other defendants, claiming (among other things) breach of contract, breach of fiduciary duty, conversion and conspiracy. The plaintiffs sought actual damages, exemplary damages, pre-judgment and post-judgment interest, attorney's fees and court costs. CTPLP counterclaimed for approximately $150 of unpaid joint interests billings, interest, attorneys' fees and court costs. After a three-week trial, the District Court in Rusk County submitted 36 questions to the jury which covered all of the claims and counterclaims in the lawsuit. The jury's answers supported the plaintiffs' claims against the Company and its subsidiaries, CTPLP's counterclaim against the plaintiffs and two of the affirmative defenses asserted by the defendants. The Company and its subsidiaries immediately filed a notice of appeal. The plaintiffs recently filed a motion for entry of judgement seeking damages, interest and attorney's fees aggregating $3,394 against the Company. The Company and its subsidiaries are preparing motions to have the District Court disregard certain jury findings and to render judgment on other findings. A hearing on the post verdict motions is set for the second week in March 2001. Special counsel to the Company does not consider an unfavorable outcome to this lawsuit probable. The Company's management and legal counsel believe that several of the plaintiffs' primary legal theories are contrary to established Texas law and that the Court's charge to the jury was fatally defective. They further believe that any judgment for plaintiffs based on those theories or on the jury's answers to certain questions in the charge cannot stand and will be reversed on appeal. Nevertheless, the Company and its subsidiaries may be required to post a bond to cover the total amount of damages awarded to the plaintiffs in any judgment and to maintain that bond until the resolution of any appeals (which may take several years). Larry Long Litigation The parties agreed to settle this lawsuit for a $250 payment by the Company. The parties are still finalizing the related settlement agreement, subject to court approval. MGNG Litigation The parties agreed to settle this lawsuit by reducing an accounts payable to MGNG from one of the companies subsidiary by $325. The parties are still finalizing the related settlement agreement. -8- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements ("$000's" Omitted Except Share and Per Unit Amounts) (Unaudited) Note 5 - New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, as amended, 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, depends 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. The Company adopted FAS 133 effective October 1, 2000. At December 31, 2000, the Company had no freestanding derivative instruments in place and had no embedded derivative instruments. The adoption of SFAS 133 has had no impact on the Company's results of operations or financial condition. Note 6 - Derivative Financial Instruments On June 1, 1999, the Company acquired all of the oil and gas assets of AmBrit Energy Corp. ("AmBrit"). In July 1999, the Company hedged approximately 69% of its anticipated consolidated crude oil production (approximately 32,000 barrels per month) and approximately 50% of its anticipated consolidated natural gas production (approximately 300,000 mcf per month) for the period from September 1, 1999 to July 31, 2000. The Company used futures contracts to hedge such production. The average hedged prices for crude oil and natural gas, which are based upon futures prices on the New York Mercantile Exchange, were $20.02 per barrel of crude oil and $2.64 per mcf of gas. For the three months ended December 31, 1999, oil and gas sales decreased $331 as a result of hedging activities. Hedging activities did not impact oil and gas sales for the three months ended December 31, 2000 because the Company did not hedge any of its production subsequent to July 31, 2000. Note 7 - Information Concerning Reportable Segments For the periods ended December 31, 2000 and 1999, the Company operated in only one segment of the energy industry, oil and gas exploration and production. Until May 31, 1999, the Company also operated in the natural gas marketing segment of the energy industry. 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) on that date. As a result of the stock split 4,675,258 additional shares were issued and the Company's common stock book value was increased $2,338 to reflect additional par value applicable to the additional shares issued to effect the stock split. All share changes, including those affecting the recorded book value of common stock, have been recorded retroactively. -9- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements ("$000's" Omitted Except Share Amounts) (Unaudited) Note 9 - Sale of Company Exploration and Production Assets In July 2000, the Company engaged Energy Spectrum Advisors of Dallas, Texas to advise the Company concerning strategic alternatives, including the possible sale of its oil and gas assets. In December 2000, several companies submitted bids for the Company's domestic oil and gas assets. The total of the highest bids for all of the Company's properties aggregated approximately $48,000 with an effective date of October 1, 2000. The Company's Board of Directors decided not to sell its oil and gas assets at the prices offered. At the present time, the Company is again seeking acquisitions in the energy sector, including oil and gas properties, gas marketing and pipeline operations and other investments. Note 10 - Subsequent Events Subsequent to December 31, 2000, the Company acquired 40,000 additional shares of its common stock for $272. The operator drilling the fourth well in the Company's Romanian joint venture reported gas shows in a formation not targeted by the Company. The Company is not able to predict whether such gas shows indicate commercial gas reserves. Progress in the third Romanian well has been halted for almost three months due to technical difficulties. In January 2001, one of the wells operated by one of the Company's subsidiaries spilled approximately 800 barrels of fluid, including approximately 250 barrels of crude oil, into an adjacent ditch and onto nearby land. The Company is currently completing clean-up operations. The Company expects total clean up costs to aggregate approximately $150. The Company believes that its insurance will cover all of the costs incurred except a $25 deductible. On February 9, 2001, the Company was served with a lawsuit filed in the Superior Court of California, County of Los Angeles, Central District. The plaintiff, the State Labor Commissioner of the State of California, has sued the Company and fourteen other defendants for unpaid severance pay on behalf of several former employees of various entities that owned the Powerine Refinery in Santa Fe Springs, California. The suit seeks damages of $1,500, including $500 of punitive damages. Management of the Company believes that the Company is not liable for any of the damages sought and is in the process of engaging a special counsel to defend it against the lawsuit. It appears that the plaintiffs have merely sued all parties having any connection whatsoever with the Powerine Refinery without regard to guilt or actual operation of that refinery. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ("$000's" Omitted Except Share and Per Unit Amounts) RESULTS OF OPERATIONS From August 1989 to September 30, 1995, two of the Company's subsidiaries conducted refining operations. By December 12, 1995, the Company's refining subsidiaries had sold all of their refining assets. In addition, Powerine merged into a subsidiary of EMC and was no longer a subsidiary of the Company. The Company's other refining subsidiary, IRLP, owns no refining assets and is in the process of liquidation. As a result, the Company has accounted for its refining operations as discontinued operations in the Company's financial statements as of September 30, 1995 and retroactively. Accordingly, discussion of results of operations has been confined to the results of continuing exploration and production operations and the anticipated impact, if any, of liquidation of the Company's remaining inactive refining subsidiary and contingent environmental liabilities of the Company or its refining subsidiaries. Exploration and Production Key exploration and production data for the quarters ended December 31, 2000 and 1999 are as follows:
Three Months Ended December 31, ------------------------------- 2000 1999 ---- ---- Production Volumes: Barrels of crude oil (net)............................... 67,798 69,188 Mcf (thousand cubic feet) of natural gas (net)........... 751,064 1,108,491 Mcf equivalents (net) *.................................. 1,157,852 1,523,619 Oil/Gas Prices:- Crude Oil/Barrel: Gross................................................. $29.46 $23.70 Hedging effects....................................... (3.82) ------ ------ Net of hedging........................................ $29.46 $19.88 ====== ====== Natural Gas/Mcf: Gross................................................. $ 4.52 $ 2.50 Hedging effects....................................... (0.06) ------ ------ Net of hedging........................................ $ 4.52 $ 2.44 ====== ====== Oil and Gas Production Expenses/Mcf Equivalent................... $ 1.21 $ 0.90**
- ------------- * 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. ** Reclassified to reflect reduction of oil and gas production expenses by amount of revenues from well operations. Oil and gas sales increased $1,309 or 32% from the first quarter of fiscal 2000 to the first quarter of fiscal 2001. The increase was caused by offsetting factors. Oil and gas sales decreased $981 due to a decrease in production. Crude oil production, natural gas production and equivalent mcf production decreased by 2%, 32.2% and 24%, respectively. A significant portion of the decrease in natural gas production related to properties acquired from AmBrit on June 1, 1999. In many cases the decreases in gas production approximated the decline curve expected. In a few cases, the decrease significantly exceeded the expected production decline. Although the Company drilled nine exploratory wells in fiscal 2000, only one of these was completed as a producer. As a result, the Company has not replaced the production lost due to declining production from its existing properties. -11- Oil and gas sales increased $2,290 from the first quarter of fiscal 2000 to the first quarter of fiscal 2001 as a result of increased prices. The increase was especially evident in the gross price received by the Company for natural gas. Such price increased 80.8% from $2.50 per mcf for the quarter ended December 31, 1999 to $4.52 per mcf for the quarter ended December 31, 2000. The natural gas prices received by the Company for the recent quarter are the highest ever received by the Company. Oil and gas production expenses increased $29 or 2.1% from the first quarter of fiscal 2000 to the first quarter of fiscal 2001. For the quarter ended December 31, 2000, such expenses were $1.21 per equivalent mcf of production versus only $.90 per equivalent mcf for the quarter ended December 31, 1999. This 34.4% increase is attributable to several factors. Many components of oil and gas production expense (such as pumper salaries and the costs to operate field offices) are essentially fixed and thus increase on a per unit of production basis when production decreases - as was the case during the quarter ended December 31, 2000. In addition, the Company's properties are older (the Company has not made any significant acquisitions since December 1999) and such properties typically incur higher production expenses than newer properties that have recently been drilled. The Company also attributes its relatively high unit production costs to the fact that a large number of the properties acquired from AmBrit are operated by outside parties who charge operating fees to operate the wells in which the Company has an interest. Some of these operating fees, which are generally fixed pursuant to the governing joint operating agreements have become expensive on a per unit basis as production declined. General and administrative costs increased $352 or 25% from the first quarter of fiscal 2000 to the first quarter of fiscal 2001. The increase was primarily caused by increased legal costs and non-recurring costs of $181 related to the Company's effort to sell its oil and gas properties. For the quarter ended December 31, 2000, legal costs were $353 versus $129 for the quarter ended December 31, 1999. The legal costs for the quarter ended December 31, 2000 relate primarily to the Long Trusts litigation (see Note #3 to the consolidated financial statements). Depreciation, depletion and amortization decreased $573 or 45% from the first quarter of fiscal 2000 to the first quarter of fiscal 2001. Of this amount $530 related to depletable oil and gas properties and the remaining $43 related to depreciable equipment and furniture and fixtures. The decrease in depletion was caused by two factors. Decreased production accounted for $286 and a decrease in the depletion rate from $.78 per equivalent mcf to $.57 per equivalent mcf accounted for $244. The tax provision for the quarter ended December 31, 1999 essentially represents Federal alternative minimum taxes at an effective rate of 2%. The tax provision for the quarter ended December 31, 2000 represents the utilization of a deferred tax asset recorded at September 30, 2000 at an effective tax rate of 36%. The deferred tax asset at September 30, 2000 resulted when the Company re-evaluated its ability to generate sufficient taxable income to utilize the gross deferred tax asset attributable to its tax carryforwards. A similar net deferred tax asset was not recorded at September 30, 1999. Earnings per Share On December 29, 1999, the Company's Board of Directors declared a stock split in the form of a 200% stock dividend applicable to all stockholders of record on January 12, 2000. The effect of the stock split was to triple the number of shares outstanding. The stock split did not apply to the Company's treasury stock. The stock split is reflected retroactively in share amounts and earnings per share computations in the accompanying financial statements. In addition, since October 1, 1999, the Company has reacquired 588,803 shares of its common stock. As a result of these share acquisitions, earnings per outstanding share have been higher than would be the case if no shares had been repurchased. LIQUIDITY AND CAPITAL RESOURCES All statements other than statements of historical fact contained in this report are forward-looking statements. Forward-looking statements in this report generally are accompanied by words such as "anticipate," "believe," "estimate," or "expect" or similar statements. Although the Company believes that the expectations reflected in such forward-looking statements are -12- reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements are disclosed in this report, including without limitation in conjunction with the expected cash sources and expected cash obligations discussed below. All forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements in this paragraph. During the three months ended December 31, 2000, the Company generated $1,809 from operating activities. During the same period the Company invested $1,144 in oil and gas properties and $300 to reacquire shares of its common stock. In addition, it paid $333 in stockholder dividends. At December 31, 2000, the Company had $11,597 of unrestricted cash, $20,354 of working capital and no long-term debt. Discontinued Refining Operations Although the Company's former and present subsidiaries have exited the refining business and third parties have assumed environmental liabilities, if any, of such subsidiaries, the Company and several of its subsidiaries remain liable for contingent environmental liabilities (see Note 4 to the consolidated financial statements included in Item 1 of this Form 10-Q). Expected Sources and Uses of Funds As of December 31, 2000, the estimated future cash expenditures of the Company for the period from January 1, 2001 to September 30, 2002 were as follows: a. Investments in Oil and Gas Properties 1. Development drilling on existing acreage................... $ 9,152 2. Romanian concession remaining - three wildcat wells........ 1,100 3. Dividends.................................................. 2,303 ------- $12,555 ======= If subsequent wildcat Romanian wells are successful, the Company may increase its investment in that country significantly and could conceivably spend $10,000-$15,000 if new oil or gas fields are discovered. In July 2000, the Company engaged Energy Spectrum Advisors of Dallas, Texas to advise the Company concerning strategic alternatives, including the possible sale of its domestic oil and gas assets. In December 2000, several companies submitted bids for the Company's oil and gas assets. The total of the highest bids for all of the Company's properties aggregated approximately $48,000 with an effective date of October 1, 2000. The Company's Board of Directors decided not to sell its oil and gas assets at the prices offered. As a result, the Company is again seeking acquisitions in the energy sector, including oil and gas properties, gas marketing and pipeline operations and other investments. Given current high oil and gas prices and resultant seller price expectations, there can be no assurance that the Company will be able to acquire energy sector assets at prices it considers favorable. If the Company is able to acquire energy sector assets at favorable prices, its expenditures will exceed the estimated future expenditures listed above. b. Repurchase of Company Shares - as of February 5, 2001, the Company had repurchased 4,871,020 shares of its common stock (13,853,000 shares after taking into account the 200% stock dividend which was effective January 31, 2000) at a cost of $66,506. The Company's Board of Directors has authorized the repurchase of up to 396,946 additional shares to provide an exit vehicle for investors who want to liquidate their investment in the Company. The decisions whether to repurchase such additional shares and/or to increase the repurchase authorization above the current level will depend upon the market price of the Company's stock, tax considerations, the number of stockholders seeking to sell their shares and other factors. c. Recurring Dividends - the Company's Board of Directors adopted a policy of paying a $.20 per share annual dividend ($.05 per share quarterly) in June of 1997. The Company expects to continue to pay such dividend until the Board of Directors, in its sole discretion, changes such policy. d. Required Escrow Fund - Litigation - the Company may have to escrow as much as $3,394 for a lengthy period - perhaps several years - as it appeals a jury verdict in the Long Trusts' litigation. (See Note 4 to the consolidated financial statements included in Item #1 of this Form 10-Q.) -13- At December 31, 2000, the Company had available the following sources of funds: Unrestricted cash - December 31, 2000......................... $11,597 Line of credit - energy bank.................................. 30,000 Marketable securities......................................... 7,792 ------- $49,389 ======= The Company's line of credit expires February 29, 2001, but the Company is currently in the process of extending its line of credit and believes it will be able to do so. In addition, the Company anticipates significant future cash flow from exploration and production operations. The estimated sources of funds are subject to most of the risks enumerated below. The realization from the sale of the Company's investment in the common stock of Penn Octane and Delta are dependent on the market values of such stock and the Company's ability to liquidate its Penn Octane and Delta stock investments at or near such market values. Since Penn Octane and Delta are thinly capitalized and traded, liquidation of a large volume of Penn Octane and/or Delta stock without significantly lowering the market price may be impossible. The Company thus expects that it can fund all of its present drilling commitments from its own unrestricted cash and expected cash flow from operating activities. The Company can also use its $30,000 line of credit, if extended, and future cash flow from production to acquire additional oil and gas properties and/or to conduct additional drilling. The foregoing discussions do not contemplate any adverse effects from the risk factors listed below: a. Contingent environmental liabilities. b. Reserve price risk - the effect of price changes on unhedged oil and gas production. c. Exploration and production reserve risk - the effect of not finding the oil and gas reserves sought during new drilling. d. Reserve risk - the effect of differences between estimated and actual reserves and production. e. Public market for Company's stock. f. Future of the Company. g. Foreign operation risks. Since the Company has already incurred $2,519 and expects to spend at least $1,100 in the next year to complete required drilling on its three Romanian concessions, it continues to be subject to foreign operations risks. 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. 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. Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company has not hedged its remaining expected crude oil and 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. -14- 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, 2000. Also see Note 4 to the December 31, 2000 financial statements included in Part I. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: 10.136 Second Amendment - Promissory Note of Penn Octane Corporation 11.1 Statement re: Computation of Earnings Per Share 27 Financial Data Schedule (B) Reports on Form 8-K: None -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 13, 2001 CASTLE ENERGY CORPORATION /s/Richard E. Staedtler ------------------------- Richard E. Staedtler Chief Financial Officer Chief Accounting Officer -16- EX-10.136 2 0002.txt EXHIBIT 10.136 Exhibit 10.136 December 21, 2000 Mr. Richard Staedtler CEC, Inc. One Radnor Corporation Center 100 Matsonford Road, Suite 250 Radnor, PA 19087 Re: Second Amendment - Promissory Note ("Note") of Penn Octane Corporation (the "Company") Currently Held By You With a Due Date of December 15, 2000 and Related Agreements and Instruments (Revises Second Amendment dated December 19, 2000) Dear Mr. Staedtler: Reference is made to the Note currently held by you and to all of the various agreements and instruments, as amended, heretofore entered into in connection therewith (collectively, the "Original Documents"), including, without limitation, (i) the Purchase Agreement between you and the Company (the "Purchase Agreement"); (ii) the Note; (iii) the Common Stock Purchase Warrant (the "Warrants") issued to you by the Company that is exercisable for the purchase of shares (the "Warrant Shares") of the Common Stock, $.01 par value (the "Common Stock"), of the Company; (iv) the Registration Rights Agreement (the "RR Agreement") between you and the Company covering the Warrant Shares; and (v) the letter agreement between you and the Company amending certain of the foregoing (the "First Amendment"). Contemporaneously with your acquisition of the Note and Warrants, various other investors (the "Other Investors") also acquired Promissory Notes (the "Other Notes") and Common Stock Purchase Warrants (the "Other Warrants") exercisable for the purchase of shares of Common Stock; and, in connection therewith, have entered into and/or received agreements and instruments that are identical or similar to the Original Documents (collectively, the "Other Original Documents"). Certain of the Other Investors (but not all of such Other Investors) acquired their respective Other Notes and Other Warrants through PMG Capital Corp. as placement agent for the Company ("PMG"). PMG or an affiliate is acting in a similar capacity in connection with the transactions contemplated by this letter agreement, for which the Company has agreed to pay PMG the amounts described in Schedule I hereto. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and you hereby agree that the Original Documents shall be, and they hereby are, amended, effective from and after December 15, 2000, to the full extent necessary to provide for the following: 1 1. Purchase Agreement. The Purchase Agreement, as heretofore amended by the First Amendment, is hereby further amended to the full extent necessary to: (a) Also make the Company's and your representations, warranties and agreements contained in Sections 4 (other than Section 4(d) thereof), 5, 8, 9, 10 (subject to item 1(b) below), 11, 12, 13, 14 and 15 of the Purchase Agreement applicable to the transactions contemplated hereby and to the securities and instruments you are acquiring or amending as contemplated hereby; provided, however, that for purposes of this letter agreement, the references in such sections to: (i) this "Agreement" shall mean this letter agreement; (ii) the "Warrants" shall mean the Warrants, as amended hereby, the New Warrants and the Additional New Warrants; (iii) the "Warrant Shares" shall mean all shares of the Company's Common Stock issued or issuable on exercise of the Warrants, the New Warrants and the Additional New Warrants; and (iv) the "Purchaser Securities" shall mean the Note and the Warrants, each as amended hereby, and the New Warrants and the Additional New Warrants. (b) Also exclude from the definition of "Financing" contained in Clause (i)(a) of Recital A to and Section 10 of the Agreement (as heretofore amended by the First Amendment): (i) any future transactions engaged in by the Company or its subsidiaries the net proceeds of which are used to acquire the remaining 50% interest in the leases described in the second paragraph of Section 4.3 of the original Note that is not presently owned by the Company or its subsidiaries (and to pay expenses incurred in connection therewith); (ii) the restructuring of up to $5,654,000 in principal amount of the Note and Other Notes (and any borrowings or other financings the proceeds of which are used for the purposes contemplated by item 6 hereof) (the "Restructured Debt"), and (iii) any future transactions engaged in by the Company or its subsidiaries to provide up to $5,000,000 in additional working capital for the Company and its subsidiaries (the "Additional Working Capital Debt"). 2. Note. The Note, as heretofore amended by the First Amendment, is hereby further amended to the full extent necessary to: (a) Delete the reference in Section 1(i) thereof to "December 15, 2000" and insert in lieu thereof the date "December 15, 2001". (b) Provide for payment by the Company, on December 15, 2000, of accrued and unpaid interest on the Note through December 15, 2000 at the current interest 2 rate of 9% per annum; and for an increase in such rate to interest at the rate of 13.5% per annum commencing on December 16, 2000 until the Note has been paid in full, with payments of accrued and unpaid interest due quarterly on March 15, 2001, June 15, 2001, September 15, 2001 and December 15, 2001. (c) Provide for an increase in the interest rate contemplated by item 2(b) hereof from 13.5% per annum to 17.5% per annum during the period (i) from and after March 31, 2001 during which the Registration Statement (hereinafter defined) has not been declared effective by the SEC (hereinafter defined); provided, however, that the March 31, 2001 date shall instead be April 30, 2001 if the Company is at the time ineligible to use SEC Form S-3 for purposes of such Registration Statement, and (ii) that the Company is obligated to keep the Registration Statement effective pursuant to the RR Agreement but does not do so. (d) Incorporate and make applicable the provisions contemplated by item 1(b) above, it being understood and agreed that the persons or entities providing the funds referred to in item 1(b) hereof shall also be deemed to constitute "Additional Fund Providers" for all purposes hereof. (e) Amend Section 2.3 of the Note to read as follows: The Company will grant to the holders of the Note, the Other Notes, the Restructured Debt, if any, and the Additional Working Capital Debt, if any, the security interest described in Schedule II attached hereto. Pending the perfection of such security interest as described below, Jerome B. Richter shall execute a guaranty of the Company's obligations under the Note, the Other Notes, the Restructured Debt and the Additional Working Capital Debt (collectively the "Secured Obligations"), which guaranty will be with recourse only to a pledge of 2,000,000 shares of the Company's Common Stock held by Mr. Richter and to be pledged by Mr. Richter to secure the aforementioned guaranty. 1,000,000 shares shall be released from the lien of such pledge upon the perfection of the security interest of the holders of the Secured Obligations in the American Assets (as defined in Schedule II). If the entire security interest in Schedule II is not perfected on or before March 15, 2001, the interest rate on the Note and the Other Notes, as amended by Section 2(b) hereof, shall be further increased by 3% per annum for the period from and including March 15, 2001 though and including the date on which such security interest is perfected. For purposes of this Section 2(e), a security interest will be deemed perfected when either (a) PMG, as collateral agent, acting reasonably, is satisfied in its discretion and based on the advice of its counsel that such security interest has been validly perfected in accordance with all applicable laws with the priority specified in Schedule II attached hereto, or (b) the Company delivers to PMG, as collateral agent, a legal opinion, in form and substance satisfactory to PMG and upon which PMG and each holder of any Secured Obligations shall be permitted to rely, that the security interest has been validly perfected in accordance with all applicable laws with the priority specified in Schedule II attached hereto. 3 (f) Amend Section 6 of the Note to read as follows: Certain Restrictive Covenants. For so long as this Note is outstanding, the Borrower covenants and agrees that the Borrower will not pay or issue (i) cash management fees, cash bonuses or warrants or options to purchase common stock to its officers or directors other than cash management fees, cash bonuses, warrants or options 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, cash bonuses, warrants and options are paid or issued; 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. 3. Warrants. The Warrants are hereby amended to the full extent necessary to (a) extend the current expiration date from December 15, 2002 to December 15, 2003; (b) reduce the current per Warrant Share exercise price from $4.00 to $3.00 (subject to further reduction on June 15, 2001 if the Note is not paid in full on or before June 15, 2001, to a price determined by assuming a per Warrant Share exercise price of $2.50 on the date hereof and further adjusting such price by any actual dilution/anti-dilution adjustments required to be made after the date hereof pursuant to the terms of the Warrants through and including June 15, 2001), in each case, subject to application of the dilution/anti-dilution provisions of the Warrants; and (d) provide that the Company's repurchase rights contained in Section 9 of the Warrants may not be exercised prior to the first anniversary of payment in full of the Note. In addition, the Warrants are hereby amended to allow the Holder to exercise the Warrant through a cancellation of the Note up to the Aggregate Purchase Price, in lieu of a cash exercise. 4. New Warrants. The Company will issue to you, on or before January 15, 2001, warrants dated as of the date hereof to purchase 125 shares of Common Stock for each $1,000 of principal amount of the Note (the "New Warrants"), subject to the application of dilution/anti-dilution provisions thereof. The New Warrants will have an initial exercise price of $3.00 per share (subject to further reduction on June 15, 2001 if the Note is not paid in full on or before June 15, 2001) to a price determined by assuming a per Warrant Share exercise price of $2.50 on the date hereof and further adjusting such price by any actual dilution adjustments required to be made after the date hereof pursuant to the terms of the Warrants through and including June 15, 2001. All of the New Warrants to the extent exercisable will be exercisable until December 15, 2003. The Company will have the same repurchase rights in respect of the New Warrants as it has in respect of the Warrants. The forms of the New Warrants will be identical to the form Warrants except to the extent reflected above in this item 4 or otherwise necessary to reflect the transactions contemplated by this letter agreement. 4 5. RR Agreement. The RR Agreement is hereby amended to the full extent necessary to provide for the Company, at its expense, being obligated to file a registration statement (the "Registration Statement") pursuant thereto under the Securities Act of 1933, as amended, with the Securities and Exchange Commission ("SEC") covering the resale by you of the shares of Common Stock covered by the New Warrants (the "New Warrant Shares"). Such New Warrant Shares and similar securities acquired by the Other Investors or others in connection with restructuring the Other Notes shall be deemed to be "Registrable Securities" thereunder; and, thus, holders thereof shall also be entitled to participate in any such registration. The Company shall be obligated to file such Registration Statement with the SEC on or before February 28, 2001; provided, however, that such date shall instead be March 31, 2001 if the Company is, at the time, ineligible to use SEC Form S-3 for purposes of such Registration Statement. 6. Company Representation. In addition to the representations and warranties of the Company set forth in Section 4 of the Purchase Agreement and incorporated herein pursuant to Section 1(a) of this Agreement, and subject to the truth and accuracy of the Purchaser's representation set forth in Section 5 of the Purchase Agreement as incorporated into this Agreement pursuant to such Section 1(a) and to the truth and accuracy of the representation of PMG in Schedule I attached hereto, 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. 7. Declining Noteholders. Notwithstanding anything to the contrary contained in your Original Documents, you hereby agree that, to the extent that any Other Investors do not agree to a counterpart of this letter agreement (collectively, the "Declining Noteholders"), the Company shall be entitled to repay such Declining Noteholders all amounts owing by the Company to such Declining Noteholders under their respective Other Original Documents without, by virtue thereof, in any way breaching or otherwise being in default of any of your Original Documents. Any such amounts paid, shall be excluded from the definition of "Financing" provided for in your Purchase Agreement and Note. 8. PMG Director Nominees. (a) So long as the Note or any Other Notes remain unpaid, PMG, on behalf of you and the Other Investors who are not Declining Noteholders, shall be allowed to nominate one director to the Company's board (currently there are seven board members, including Messrs. Richter, Bracamontes, Lockett and Bothwell); and Messrs. Richter, Bracamontes, Lockett and Bothwell shall vote their shares in support of the election of such PMG nominee and, if applicable, take such actions as directors to cause such nominee to be elected as a director. If PMG does not elect to designate a nominee for election as a director or if PMG's nominee is not then serving as a director, PMG shall nonetheless have the right to designate a non-voting observer to attend each board meeting. PMG's board representative or non-voting observer shall be entitled to all notices, communications and information made available to the other members of the Company's board. PMG's board representative shall receive the same compensation, including director options, as any 5 outside member of the Board. In addition, the Company shall reimburse all reasonable out of pocket expenses for PMG's board representative or non-voting observer to attend such board meetings. Board meetings shall be held not less than quarterly; provided, however, that meetings by telephone or unanimous written consents may be used in lieu of meetings at which the directors are physically present. In the event of an Event of Default, as defined in Section 2.1 of the Note, PMG, on behalf of you and the Other Investors who are not Declining Noteholders, shall be entitled to nominate an additional two outside directors, and Messrs. Richter, Bracamontes, Lockett and Bothwell shall vote their shares or, if applicable, take such action as directors to cause such additional nominees to be elected as directors. (b) PMG shall cause any non-voting observer to keep confidential any notices, communications and information such observer receives pursuant to Section 8(a) hereof that is nonpublic, confidential or proprietary in nature with respect to the Company; provided, however, that the foregoing shall be inoperative as to any such information which (i) is or becomes generally available to the public other than as a result of a disclosure by such observer or PMG; (ii) becomes available to PMG or such observer on a non- confidential basis from a third-party that is not, to the knowledge of PMG or such observer, subject to a similar confidentiality undertaking; or (iii) was known to PMG or the observer on a nonconfidential basis prior to its disclosure by the Company. (c) The Purchaser agrees that, for purposes of this Section 8, the Note and each Other Note shall be considered paid when the Company furnishes to PMG evidence reasonably satisfactory to PMG that it has forwarded payment to the holders of such Note and Other Notes pursuant to Section 1 thereof; provided, however, that such Note or Other Note shall no longer be deemed to have been paid in the event that any such payment forwarded by check is not honored when presented for payment. For purposes of this Section 8(c), the following shall be considered reasonably satisfactory evidence of payment: (i) a copy of a certified check and evidence that such check has been sent by registered mail, return receipt requested to the holder's address set forth in Section 14 of such holder's Purchase Agreement or such other address as such holder may have designated to the Company pursuant to Section 1 of such holder's Note or Other Note or (ii) a copy of wire transfer instructions from a holder together with confirmation of receipt of any such wire transfer duly made pursuant to such instructions. (d) The Purchaser acknowledges that, if requested by the Company, upon payment in full of the Note and all Other Notes within the meaning of this Section 8, every PMG board representative shall resign as a director of the Company. 9. Designation of Collateral Agent. The undersigned holder of the Note agrees that PMG will serve as collateral agent for all holders of Secured Obligations. The terms of this agency appointment will be contained in the agreements evidencing the security interests (including the stock pledge) referenced in Section 2(e) hereof. 6 Please indicate your agreement with the above by signing below and faxing an executed copy to Ian Bothwell at (562) 929-1921. Very truly yours, Penn Octane Corporation By: /s/ Ian Bothwell ------------------------------------------ Its: Vice President and Chief Financial Officer 7 The undersigned holder of the Note and other Original Documents referred to in the within letter agreement hereby acknowledges his/her/its agreement to all of the provisions of such letter agreement. The undersigned also agrees to keep the contents of this letter agreement and any documents or discussions regarding the same strictly confidential and not to use the same for any purpose pending public disclosure thereof by the Company;* provided, however, that the undersigned may consult with his, her or its agents and advisors with respect to the transactions contemplated hereby and, in connection therewith, disclose the terms and contents of this letter agreement and any other documents relating to the subject matter thereof or hereof. Mr. Richard Staedtler CEC, Inc. By: /s/ Richard E Staedtler -------------------------------------------- Its: CFO ------------------------------------------- Promissory Note Amount: $500,000.00 ------------ Name and Telephone Number of Holder: Castle Energy Corporation 610-995-9400 *Except as required by SEC 8 Schedule I The Company has paid to PMG a cash retainer in the amount of $25,000. The Company will pay to PMG a cash fee equal to 3% of the amount of the Note and the Other Notes the holders of which execute the letter agreement in the form to which this Schedule I is attached (other than certain such holders affiliated with the Company), against which the $25,000 retainer will be credited. In the event that PMG sells any additional notes on terms substantially similar to the terms of the Note, as amended by the letter agreement to which this Schedule I is attached, including without limitation new notes the proceeds of which are used to repay any Declining Noteholders, the Company will pay PMG a placement fee of 7% of the proceeds of such sale. The Company will also reimburse PMG for all reasonable out-of-pocket expenses, including reasonable attorneys fees. In consideration of the Company's agreement to pay the foregoing to PMG, PMG hereby represents to the Company that the transactions contemplated by the letter agreement to which this Schedule I is attached, and all of PMG's filings in connection therewith, and the consideration to be received by PMG as contemplated by this Schedule I, in each case comply with all applicable federal and state securities laws and the National Association of Securities Dealers, Inc. rules in connection with such transactions, and PMG further represents and covenants that it, on behalf of the Company, has made and will continue to timely make all filings required to be made by the Company in order to make the transactions contemplated by this letter agreement exempt from the registration or qualification requirements of all applicable federal and state securities laws, and that such filings comply (or will comply) with the applicable requirements of all such laws. PMG has executed this Schedule I solely for purposes of the provisions of the second paragraph hereof as of this 19th day of December, 2000. PMG Capital Corp. By: /s/ Richard Hansen -------------------------------------------- Name: Richard Hansen -------------------------------- Title: President -------------------------------- 9 Schedule II Security Interest to be Granted ------------------------------- 1. Security interest is all inventory and accounts receivable of the Company, subordinate only to the prior security interest thereon held by RZB Finance L.L.C. and Bayerische Hypo-und Vereinsbank Aktiengeselischaft (collectively, "RZB"). 2. Security interest in all other assets of the Company located in the United States of America, including without limitation all of the Company's right, title and interest to: a terminal facility in Brownsville, Texas (including eleven storage and mixing tanks, four mixed product truck loading racks, one specification product propane loading rack, two racks capable of receiving LPG delivered by truck, three railcar loading racks which permit loading and unloading of LPG by railcar and the rights under a lease for the 31(+/-) acres of real estate upon which such facility is located) (collectively the "Brownsville Terminal"); a 132-mile pipeline connecting Exxon Company, USA's King Ranch Gas Plant in Kleberg County, Texas and Duke Energy's La Gloria Gas Plant in Jim Wells County, Texas to the Brownsville Terminal; 21 million gallons of storage capacity in Markham, Texas; and two parallel pipelines running from the Brownsville Terminal to the United States/Mexico border (the "US Pipelines") and connecting to the Mexican Pipelines (as hereinafter defined). The foregoing security interest shall be senior to all other liens on such assets (other than liens for taxes not yet due and, in the case of the US Pipelines, for a contractor's lien in an amount not to exceed $1 million), and RZB shall execute an appropriate subordination and intercreditor agreement in form and substance reasonably satisfactory to PMG as collateral agent. 3. A security interest in all of the Company's right, title and interest to: a terminal facility in Matamoros, Mexico (including three storage tanks, ten specification product truck loading racks for LPG product and approximately 35(+/-) acres upon which such facility is located (the "Matamoros Terminal") and two parallel pipelines running from the Matamoros Terminal to the Mexico/United States border (the "Mexican Pipelines") and connecting to the US Pipelines. The foregoing security interest shall be senior to all other liens on such assets (other than liens for taxes not yet due), and RZB shall execute an appropriate subordination and intercreditor agreement in form and substance reasonably satisfactory o PMG as collateral agent. 4. For purposes of this Schedule II and the letter agreement to which it is attached, the assets described in the Items 1-2 hereof are referred to as the "American Assets" and the assets described in Item 3 hereof are referred to as the "Mexican Assets." 10 JOINDER The undersigned hereby join in this letter agreement as of this 19th day of December, 2000 for the purposes of agreeing to their respective obligations under the provisions of Section 8 hereof and Jerome B. Richter further joins in this letter agreement for the purpose of agreeing to his obligations under the provisions of Section 2(e) hereof. /s/ Jerome B. Richter --------------------------------- Jerome B. Richter /s/ Jorge R. Bracamontes --------------------------------- Jorge R. Bracamontes /s/ Jerry L. Lockett --------------------------------- Jerry L. Lockett /s/ Ian T. Bothwell --------------------------------- Ian T. Bothwell 11 EX-11.1 3 0003.txt EXHIBIT 11.1 Exhibit 11.1 Castle Energy Corporation Statement of Computation of Earnings Per Share (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended December 31, --------------------------------------------------------------- 2000 1999 --------------------------- -------------------------- Basic Diluted Basic Diluted ---------- ---------- ---------- ---------- I. Shares Outstanding, Net of Treasury Stock Purchased and Options Exercised During the Period: Stock, net 6,718,884 6,718,884 7,639,287 7,639,287 Purchase of treasury stock (weighted) (38,480) (38,480) (511,548) (511,548) ---------- ---------- ---------- ---------- 6,680,404 6,680,404 7,127,739 7,127,739 II. Weighted Equivalent Shares: Assumed options and warrants exercised 219,229 120,093 ---------- ---------- ---------- ---------- III. Weighted Average Shares and Equivalent Shares 6,680,404 6,899,633 7,127,739 7,247,832 ========== ========== ========== ========== IV. Net Income $ 1,110 $ 1,110 $ 259 $ 259 ========== ========== ========== ========== V. Net Income Per Share $ .17 $ .16 $ .04 $ .04 ========== ========== ========== ==========
-18- EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial data extracted from the Company's consolidated financial statements for the quarter ended December 31, 2000 included in Part I Financial information and is qualified in its entirety by reference to such financial statements. 9-MOS SEP-30-2001 DEC-31-2000 11,597 7,792 3,881 0 0 27,824 47,720 16,337 60,191 7,470 0 0 0 5,752 46,962 60,191 5,394 5,394 0 3,861 0 0 0 1,735 625 1,110 0 0 0 1,110 .17 .16
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