-----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, G1sAX3s3VVvfro75dOMMo8nWW9kIAhdAOfOpZxhrhH7op0+bJ7M4lPa51quv8Dvi 7W5tJQe2P0toC2mK7sUhig== 0000950124-97-004156.txt : 19970812 0000950124-97-004156.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950124-97-004156 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYSTAL OIL CO CENTRAL INDEX KEY: 0000745907 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720163810 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08715 FILM NUMBER: 97655510 BUSINESS ADDRESS: STREET 1: 229 MILAM ST CITY: SHREVEPORT STATE: LA ZIP: 71101 BUSINESS PHONE: 3182227791 10-Q 1 10-Q DATED JUNE 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ................. to .................. Commission file number 1-8715 CRYSTAL OIL COMPANY ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Louisiana 72-0163810 - ------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 229 Milam Street, Shreveport, Louisiana 71101 - ---------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (318) 222-7791 ------------------- NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark 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 --- ---- Common Stock outstanding on August 8, 1997 2,665,622 -------------------------------- 2 CRYSTAL OIL COMPANY INDEX Page No. -------- Part I Item 1. Financial Statements Consolidated Condensed Balance Sheets - June 30, 1997 (Unaudited) and December 31, 1996 3 Consolidated Condensed Statements of Operations - Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) 4 Consolidated Condensed Statements of Stockholders' Equity - Six Months Ended June 30, 1997 and 1996 (Unaudited) 5 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 (Unaudited) 6 Notes to Consolidated Condensed Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 -2- 3 CRYSTAL OIL COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS ($ in Thousands)
June 30 December 31 ASSETS 1997 1996 ---------- ----------- (Unaudited) (1) CURRENT ASSETS Cash and cash equivalents $ 7,302 $ 11,576 Marketable securities available for sale 49,120 50,885 Accounts receivable - net 1,170 1,042 Receivable from natural gas forward sale 12,737 - Prepaid expenses and other current assets 308 102 ---------- ---------- TOTAL CURRENT ASSETS 70,637 63,605 MARKETABLE SECURITIES 11,873 2,999 PROPERTY, PLANT AND EQUIPMENT - net 103,285 92,965 OTHER ASSETS Deferred tax assets 12,828 6,422 Restricted cash equivalents and marketable securities 1,908 1,963 Others 1,698 1,639 ---------- ---------- 16,434 10,024 ---------- ---------- TOTAL ASSETS $ 202,229 $ 169,593 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term obligations $ 267 $ 271 Accounts payable 1,207 796 Other accrued expenses 325 510 ---------- ---------- TOTAL CURRENT LIABILITIES 1,799 1,577 LONG-TERM OBLIGATIONS 37,261 36,879 DEFERRED REVENUE 42,444 17,861 COMMITMENT AND CONTINGENCIES STOCKHOLDERS' EQUITY Senior preferred stock 148 148 Common stock 27 27 Additional paid-in capital 103,296 97,156 Retained earnings 17,254 15,945 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 120,725 113,276 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 202,229 $ 169,593 ========== ==========
(1) The balance sheet at December 31, 1996, has been taken from the audited financial statements at that date, and condensed. See accompanying notes to consolidated condensed financial statements. -3- 4 CRYSTAL OIL COMPANY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS ($ in Thousands Except Shares and Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- NET REVENUES Gas storage fees $ 3,012 $ 3,015 $ 6,341 $ 6,433 Crude oil and natural gas 272 177 513 336 Interest and investment income 901 850 1,778 1,730 Other 8 29 25 78 ----------- ----------- ----------- ----------- 4,193 4,071 8,657 8,577 COSTS AND EXPENSES Operating expense and taxes 543 458 1,007 947 General and administrative expense 669 699 1,358 1,520 Interest and debt expense 804 820 1,610 1,642 Amortization of discount on sale of future contract receivables and natural gas forward sale 427 390 756 800 Depreciation, depletion and amortization 903 801 1,776 1,562 ----------- ----------- ----------- ----------- 3,346 3,168 6,507 6,471 ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 847 903 2,150 2,106 PROVISION FOR INCOME TAXES 352 364 841 824 ----------- ----------- ----------- ----------- NET INCOME $ 495 $ 539 $ 1,309 $ 1,282 =========== ========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,665,622 2,662,082 2,665,622 2,658,229 =========== ========== =========== =========== NET INCOME PER COMMON SHARE $ .19 $ .20 $ .49 $ .48 =========== ========== ============ ===========
See accompanying notes to consolidated condensed financial statements. -4- 5 CRYSTAL OIL COMPANY CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY ($ IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30 -------------------- 1997 1996 --------- --------- SENIOR PREFERRED STOCK Balance at beginning and end of period $ 148 $ 148 --------- --------- COMMON STOCK Balance at beginning and end of period 27 27 --------- --------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of period 97,156 96,902 Issuance of Common Stock - 221 Utilization of net operating loss carryforward and recognition of deferred tax assets 6,800 - Recognition of environmental remediation liability, net of tax (660) - --------- --------- Balance at end of period 103,296 97,123 --------- --------- RETAINED EARNINGS Balance at beginning of period 15,945 13,472 Net income 1,309 1,282 --------- --------- Balance at end of period 17,254 14,754 --------- --------- TOTAL STOCKHOLDERS' EQUITY $ 120,725 $ 112,052 ========= =========
See accompanying notes to consolidated condensed financial statements. -5- 6 CRYSTAL OIL COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS ($ in Thousands) (Unaudited)
Six Months Ended June 30 --------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income $ 1,309 $ 1,282 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred financing cost 129 142 Depreciation, depletion and amortization 1,776 1,562 Deferred income taxes 734 722 Net gain on sale of property, plant and equipment - (42) Net change in accrued interest income (19) (232) Decrease (increase) in accounts receivable (128) 130 Decrease (increase) in prepaid expense and other current assets (206) 100 Decrease in other assets 1 - Increase (decrease) in accounts payable and accrued expenses 226 (995) --------- --------- Net cash provided by operating activities 3,822 2,669 --------- --------- Cash flows from investing activities: Acquisition of DeSoto Properties (11,917) - Proceeds from sale of property, plant and equipment - 52 Capital expenditures (119) (411) Purchases of marketable securities (58,878) (58,679) Maturity of marketable securities 51,788 60,461 Investment of restricted funds - (918) Other 55 (25) --------- --------- Net cash provided by (used in) investing activities: (19,071) 480 --------- --------- Cash flows from financing activities: Reduction of long-term obligations (622) (272) Reduction of deferred revenue from sale of future contract receivables (2,274) (2,109) Payment of costs for financing and sale of future contract receivables - (89) Proceeds from natural gas forward sale 14,120 - Payment of costs for natural gas forward sale contract (249) - Proceeds from issuance of common stock - 221 --------- --------- Net cash provided by (used in) financing activities 10,975 (2,249) --------- --------- Net increase (decrease) in cash and cash equivalents (4,274) 900 Cash and cash equivalents at beginning of period 11,576 10,812 --------- --------- Cash and cash equivalents at end of period $ 7,302 $ 11,712 ========= =========
See accompanying notes to consolidated condensed financial statements. -6- 7 CRYSTAL OIL COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) ($ in Thousands) (Unaudited) Supplemental disclosures of cash flow information: Six Months Ended June 30 ------------------- 1997 1996 --------- -------- Cash paid during the period for: Interest, net of amounts capitalized $ 1,481 $ 1,607 ========= ======= Amortization of discount on sale of future contract receivables and natural gas forward sale $ 756 $ 800 ========= ======= Income taxes $ 134 $ 128 ========= ======= See accompanying notes to consolidated condensed financial statements. -7- 8 CRYSTAL OIL COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1. Consolidated Condensed Financial Statements The consolidated condensed balance sheet of Crystal Oil Company and its subsidiaries (the "Company") as of June 30, 1997, and the consolidated condensed statements of operations for the three and six months and stockholders' equity and cash flows for the six months ended June 30, 1997 and 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made. There have been no changes in the accounting policies from those set forth in Note A of the Notes to Consolidated Financial Statements included in the Company's 1996 Annual Report on Form 10-K. Note 2. Commitments and Contingencies The Company currently has outstanding approximately $333 thousand in standby letters of credit that relate to certain tax benefits transferred pursuant to safe harbor lease transactions and $1.5 million in an irrevocable letter of credit to support certain obligations with respect to the outstanding $36.5 million in Secured Guaranteed Notes Due 2005. The Company's obligations with respect to the letters of credit for the safe harbor lease transactions are secured by approximately $100 thousand in restricted marketable securities. For information with respect to various claims regarding environmental and other matters, see "Part II: Other Information - Item 1. Legal Proceedings". Note 3. Earnings Per Share Earnings per common share were computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the periods presented. The Senior Preferred Stock, all classes of the Company's warrants and the stock options have been considered to be the equivalent of Common Stock for all periods presented; however, the Senior Preferred Stock and the stock options were not assumed converted in 1997 and 1996, because the dilution effect was less than 3%. No warrants were assumed converted during the periods presented because the effective exercise prices were greater than the average market price of the Common Stock. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share, in February 1997. SFAS 128 is effective for periods ending after December 15, 1997. SFAS 128 establishes standards for computing and presenting earnings per share and supersedes the standards currently used for computing earnings per share under the Accounting Principles Board Opinion No. 15, Earnings Per Share. After the effective date, any prior -8- 9 period earnings per share data in subsequent reports must be restated to conform to the new standard. The adoption of SFAS 128 is not expected to have a significant effect on the Company's earnings per share as reported herein. Note 4. Property Acquisition On May 30, 1997, the Company consummated the acquisition of various proved producing and undeveloped reserves in the Bethany-Longstreet and Holly Fields in DeSoto Parish, Louisiana (the "DeSoto Properties") for a total cash purchase price of approximately $11.9 million, net of adjustments and related acquisition costs of approximately $256 thousand. The acquisition was effective on March 1, 1997, and in accordance with the "purchase method" of accounting, the results of operations of the acquired properties are included in the Company's consolidated statement of operations for the period commencing on May 30, 1997. Note 5. Natural Gas Forward Sale On June 6, 1997, the Company entered into a natural gas forward sale of approximately 16.3 Bcf of natural gas to be delivered during the period of September 1997 through December 2002 at a discounted current cash price of approximately $27 million. Under the forward sale, the Company has agreed to deliver approximately .6 Bcf of natural gas during the period beginning September 1, 1997, through December 31, 1997. The Company has also agreed to deliver on an annual basis from 1998 to 2002 between 4.2 Bcf and 2.2 Bcf of natural gas. The natural gas sold can be delivered from the production of the DeSoto Properties or other properties and to the extent necessary or desirable from other natural gas owned, developed or acquired in the future. In June 1997, the Company received $14 million from the forward sale of natural gas and will receive the remaining balance of approximately $12.7 million in September 1997. The total proceeds of approximately $27 million from the forward sale are reflected for financial accounting purposes as deferred revenues from the sale of natural gas and will be recognized as natural gas revenues and charged against deferred revenues as deliveries are made by the Company based on an undiscounted reference price for the natural gas sold subject to adjustments for certain hedging arrangements entered into by the Company. The undiscounted reference price for the natural gas sold for 1997 averaged $2.14 per MMbtu. The undiscounted reference price for the years 1998 to 2002 ranges between $1.88 and $2.34 per MMbtu. Such reference price for natural gas is subject to adjustment for price differential at delivery points. An imputed charge based on the 8.105% discount rate used in establishing the sales price of the natural gas sold will be amortized over the life of the forward sale contract as production is delivered and recorded as amortization of discount on natural gas forward sale. The forward sale of natural gas by the Company constituted a taxable transaction to the Company of approximately $27 million. The Company, however, was able to apply a portion of its net operating loss carryforwards against the tax that would otherwise have been paid. As a result, the Company recorded an increase in stockholders' equity of -9- 10 approximately $6.8 million, which represented the benefit realized from the use of the Company's net operating loss carryforwards. Because the net loss operating carryforwards related to periods prior to the Company's quasi-reorganization in 1986, the Company recognized no income as a result of its use of its net operating loss carryforwards. Note 6. Commodity Swap Contract The Company has entered into a hedging arrangement with a third party for the purpose of hedging against the volatility in prices of natural gas in the event the Company is unable to fully satisfy its obligations under the forward sale contract with the production from the DeSoto Properties and was therefore required to acquire or use production of natural gas from other sources to satisfy these obligations. This hedging arrangement is also designed to cover additional production by the Company from other properties. Under this hedging arrangement, the Company will either be entitled to receive or be required to pay, on a quarterly basis, an amount of cash equal to the difference between a scheduled price per the contract and a reference price of a MMbtu of natural gas multiplied by the schedule of volumes hedged. The hedge contract covers the period of September 1997 through December 2002 and includes an amount of natural gas volumes that approximates 40% of the Company's commitment for delivery under the forward sale contract. The Company has in effect a hedge contract for the purchase of .2 Bcf of natural gas at an average monthly price of $2.15 per MMbtu during the period of September 1, 1997, through December 31, 1997. In subsequent years, the hedge contract covers purchases between 1.8 Bcf and .7 Bcf of natural gas on an annual basis from 1998 to 2002 at monthly prices ranging from $1.89 to $2.35 per MMbtu of natural gas. The hedge contract is a derivative financial instrument and does not require deliveries of the commodity hedged. The gains or losses on the above hedge contracts will be recognized as an increase or decrease in natural gas revenues as deliveries of natural gas are made by the Company. In the case of natural gas sold by the Company pursuant to its forward sale contracts, such gains and losses will be reflected as an adjustment to the recognized price for the natural gas sold as described above. With respect to other sales of natural gas, the gains or losses will be reflected as an adjustment to the price received from such sales. Risks associated with the Company's hedge contracts arise primarily from the possible inability of the counterparties to meet their obligations under these contracts. The Company's existing hedge contract is secured by an irrevocable letter of credit from a major investment grade financial institution. The cash flows from future contracts are accounted for as hedges for sales of production and are classified as operating activities in the consolidated statements of cash flows. -10- 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is provided to assist in a further understanding of the Company's financial condition as of June 30, 1997, as well as changes in the Company's operating results. The notes to the Company's Consolidated Condensed Financial Statements included in this report, as well as the Company's Annual Report on Form 10-K for the year ended December 31, 1996, should be read in conjunction with this discussion. The Company currently owns and operates through a wholly-owned subsidiary, First Reserve Gas Company ("FRGC"), a natural gas storage facility located near Hattiesburg, Mississippi (the "Hattiesburg Facility") and holds various interests in crude oil and natural gas properties in Mississippi, Texas and Louisiana. On May 30, 1997, the Company consummated the acquisition of various proved producing and undeveloped reserves in the Bethany-Longstreet and Holly Fields in DeSoto Parish, Louisiana (the "DeSoto Properties") for a total cash purchase price of approximately $11.9 million, net of adjustments and related acquisition costs of approximately $256 thousand. The properties, which are located in North Louisiana, had at March 1, 1997, estimated net proved reserves in excess of 28 billion cubic feet of natural gas and 38 thousand barrels of condensate. The Company currently contemplates drilling approximately 20 wells in the fields over the next three years, beginning in the third quarter of this year, to supplement the existing 16 producing wells. In another transaction effective on June 6, 1997, the Company entered into a natural gas forward sale of approximately 16.3 Bcf of natural gas to be delivered during the period of September 1997 through December 2002 at a discounted current cash price of approximately $27 million. The Company is also continuing to review additional acquisition opportunities with a focus on acquisitions that will maximize the return on the Company's existing capital resources and benefit from the availability of the Company's large net operating loss carryforwards and other tax benefits. The Company is currently directing its efforts toward the acquisition of businesses and assets that would generate income for the Company on a current basis and would utilize the Company's existing tax benefits as well as present the opportunity for capital appreciation. Although the Company has and expects to continue to review acquisitions in the energy industry, the Company's acquisition strategy is not limited as to the type of business or industry. As of June 30, 1997, the Company's financial resources included $68.3 million in cash, cash equivalents and marketable securities that could be utilized for future acquisitions. The Company's only material debt consists of the indebtedness directly associated with the permanent financing for the acquisition of FRGC in 1995 and the recourse of which is primarily limited to FRGC and the assets and operations of the Hattiesburg Facility. The Company also has ongoing performance obligations with respect to the Hattiesburg Facility and with respect to its delivery obligations under its recent forward sale contract. Future acquisitions will likely involve a combination of the use of a portion of the Company's available cash and debt or other financing. To the extent possible, the Company will seek to limit the recourse of any financing to the business and assets acquired. The Company may also seek to finance future acquisitions with additional equity, if desirable. -11- 12 Results of Operations General The Company recorded net income for the three and six month periods ended June 30, 1997, of $495 thousand, $.19 per share, and $1.3 million, $.49 per share, respectively, compared to net income of $539 thousand, $.20 per share, and $1.3 million, $.48 per share, respectively, for the comparative periods in 1996. Income for the periods ended June 30, 1997 and 1996, were primarily derived from natural gas storage activities, interest and investment income on the Company's available cash and to a lesser extent from sales of crude oil and natural gas production. As a result of the recent acquisition of the DeSoto Properties, sales of natural gas production are expected to increase substantially in future periods. The Company's natural gas storage activities for the three and six month periods ended June 30, 1997, provided revenues of $3.0 million and $6.3 million, respectively, and operating income of $2.0 million and $4.3 million, respectively. For the three and six month periods ended June 30, 1996, natural gas storage activities contributed revenues of $3.0 million and $6.4 million, respectively, and operating income of $2.0 million and $4.4 million, respectively. Natural gas storage revenues derived from firm long-term contracts were $2.8 million and $5.5 million in each of the three and six month periods ended June 30, 1997 and 1996. The remaining natural gas storage revenues for the three and six month periods ended June 30, 1997 and 1996, were derived from winter and interruptible storage services, injection and withdrawal charges and other fees relating to services provided in connection with the storage and delivery of natural gas at the Hattiesburg Facility. Storage revenues for the six month period ended June 30, 1997, reflected a lower demand for winter storage due to milder weather conditions. The Company is actively marketing its interruptible storage services as well as pursuing joint venture and other arrangements with third parties to increase the utilization of the Hattiesburg Facility beyond the use for firm storage services. During the three and six month periods ended June 30, 1997, the Company's operating income from natural gas storage activities reflected operational expenses of $342 thousand and $645 thousand, respectively, and depreciation and amortization of $695 thousand and $1.4 million, respectively. The Company's natural gas storage activities for the three and six month periods ended June 30, 1996, included operational expenses of $296 thousand and $654 thousand, respectively, and depreciation and amortization of $706 thousand and $1.4 million, respectively. The Company's crude oil and natural gas exploration and production segment for the three and six month periods ended June 30, 1997, provided revenues of $272 thousand and $513 thousand, respectively, and operating income of $87 thousand and $171 thousand, respectively. For the three and six month periods ended June 30, 1996, the crude oil and natural gas exploration and production segment contributed revenues of $177 thousand and $336 thousand, respectively, and operating income of $53 thousand and $137 thousand, respectively. Crude oil and natural gas revenues resulted from the Company's limited drilling activities in late 1995 and 1996 and the Company's recent acquisition. During 1997, the Company's operating income from crude oil and natural gas production activities reflected the -12- 13 effect of increased revenues from additional natural gas production and increased operating expense and depletion expense primarily from the effect of the acquisition of the DeSoto Properties. Revenues and expenses from the Company's crude oil and natural gas exploration and production segment are expected to substantially increase as a result of the recent acquisition. Interest and Investment Income The Company's interest and investment income for the three and six month periods ended June 30, 1997, was approximately $901 thousand and $1.8 million, respectively. For the three and six month periods ended June 30, 1996, the Company's interest and investment income was approximately $850 thousand and $1.7 million, respectively. The levels of interest and investment income reflected an average investment in debt securities of $60.5 million and $63.9 million for the six month periods ended June 30, 1997 and 1996, respectively. The average interest rate received by the Company was 5.9% and 5.4% for the six month periods ended June 30, 1997 and 1996, respectively. The Company's investments of its liquid assets are primarily invested in investment grade corporate and government obligations that are for terms of less than two years. Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased in the three and six month periods ended June 30, 1997, to $903 thousand and $1.8 million, respectively, from $801 thousand and $1.6 million, respectively, for the comparative periods in 1996. The increase was primarily attributable to increases in the volumes of natural gas production and the depletion rate per net equivalent barrel of production. Depreciation, depletion and amortization will also increase in future periods as a result of the acquisition of the DeSoto Properties. Interest and Debt Expense The Company's interest and debt expense for the three and six month periods ended June 30, 1997, was $804 thousand and $1.6 million, respectively, and $820 thousand and $1.6 million, respectively, for the comparative periods in 1996. Such interest and debt expense related solely to the $36.5 million of long-term debt incurred to finance the acquisition of FRGC. Amortization of Discount on Sale of Future Contract Receivables and Natural Gas Forward Sale For the three and six month periods ended June 30, 1997, the Company recorded an expense of approximately $427 thousand and $756 thousand, respectively, for the amortization of discount on its prior sale of future fixed contract receivables to be generated from firm gas storage services and to a lesser extent for the amortization of discount on the natural gas forward sale. This expense reflects the amortization of the discount of such contract receivables through June 30, 2000, the date through which the receivables were sold, and the amortization of discount on the natural gas forward sale through December 31, 2002, under the interest method. The amortization of discount on sale of future contract receivables was approximately $390 thousand and $800 thousand for the three and six months ended June 30, 1996. -13- 14 General and Administrative Expense The Company's general and administrative expense for the three and six month periods ended June 30, 1997, was approximately $669 thousand and $1.4 million, respectively, compared to approximately $699 thousand and $1.5 million, respectively, for the comparative periods in 1996. The decrease in general and administrative expense primarily reflected the incurrence of severance compensation during the first quarter of 1996 for the termination of an employment contract with a former employee of the Company. In respect to the recent acquisition, the Company does not currently contemplate any substantial increase in the number of its employees and will consolidate the acquired operations with its current exploration and production activities. Provision for Income Taxes The results for the three and six month periods ended June 30, 1997, included a provision for income taxes of $352 thousand and $841 thousand, respectively, and $364 thousand and $824 thousand, respectively, for the comparative periods in 1996. The Company's provision for income taxes for the three and six month periods ended June 30, 1997, includes deferred tax expense and a corresponding reduction in deferred tax assets of approximately $289 thousand and $734 thousand, respectively, and $321 thousand and $722 thousand, respectively, for the comparative periods in 1996 as a result of utilization of the Company's tax net-operating loss carryforwards and other tax benefits. The forward sale of natural gas by the Company constituted a taxable transaction to the Company of approximately $27 million. The Company, however, was able to apply a portion of its net operating loss carryforwards against the tax that would otherwise have been paid. As a result, the Company recorded an increase in stockholders' equity of approximately $6.8 million, which represented the benefit realized from the use of the Company's net operating loss carryforwards. Because the net loss operating carryforwards related to periods prior to the Company's quasi-reorganization in 1986, the Company recognized no income as a result of its use of its net operating loss carryforwards. Liquidity and Capital Resources At June 30, 1997, the Company had cash and cash equivalents of approximately $7.3 million and marketable securities of approximately $61.0 million. The Company also had approximately $1.9 million in restricted cash and marketable securities securing the Company's contingent obligations with respect to outstanding letters of credit and the previously sold future accounts receivable. In addition, the Company had no debt other than the debt directly associated with and recourse primarily limited to FRGC and the Hattiesburg Facility. On June 6, 1997, the Company entered into a natural gas forward sale of approximately 16.3 Bcf of natural gas to be delivered during the period of September 1997 through December 2002 at a discounted current cash price of approximately $27 million. Under the forward sale, the Company has agreed to deliver approximately .6 Bcf of natural gas during the period beginning September 1, 1997, through December 31, 1997. The Company has also agreed to deliver on an annual basis from 1998 to 2002 between 4.2 Bcf and 2.2 Bcf of natural gas. The natural gas sold can be delivered from the production of the DeSoto Properties or other properties and to -14- 15 the extent necessary or desirable from other natural gas owned, developed or acquired in the future. In June 1997, the Company received $14 million from the forward sale of natural gas and will receive the remaining balance of approximately $12.7 million in September 1997. The initial proceeds from the forward sale of natural gas by the Company were used to refinance the purchase price of the DeSoto Properties. The remaining proceeds from the sale are expected to be used to fund the development of the DeSoto Properties. The total proceeds of approximately $27 million from the forward sale are reflected for financial accounting purposes as deferred revenues from the sale of natural gas and will be recognized as natural gas revenues and charged against deferred revenues as deliveries are made by the Company based on an undiscounted reference price for the natural gas sold subject to adjustments for certain hedging arrangements entered into by the Company. The undiscounted reference price for the natural gas sold for 1997 averaged $2.14 per MMbtu. The undiscounted reference price for the years 1998 to 2002 ranges between $1.88 and $2.34 per MMbtu. Such reference price for natural gas is subject to adjustment for price differential at delivery points. An imputed charge based on the 8.105% discount rate used in establishing the sales price of the natural gas sold will be amortized over the life of the forward sale contract as production is delivered and recorded as amortization of discount on natural gas forward sale. The Company has entered into a hedging arrangement with a third party for the purpose of hedging against the volatility in prices of natural gas in the event the Company is unable to fully satisfy its obligations under the forward sale contract with the production from the DeSoto Properties and was therefore required to acquire or use production of natural gas from other sources to satisfy these obligations. This hedging arrangement is also designed to cover additional production by the Company from other properties. Under this hedging arrangement, the Company will either be entitled to receive or be required to pay, on a quarterly basis, an amount of cash equal to the difference between a scheduled price per the contract and a reference price of a MMbtu of natural gas multiplied by the schedule of volumes hedged. The hedge contract covers the period of September 1997 through December 2002 and includes an amount of natural gas volumes that approximates 40% of the Company's commitment for delivery under the forward sale contract. The Company has in effect a hedge contract for the purchase of .2 Bcf of natural gas at an average monthly price of $2.15 per MMbtu during the period of September 1, 1997, through December 31, 1997. In subsequent years, the hedge contract covers purchases between 1.8 Bcf and .7 Bcf of natural gas on an annual basis from 1998 to 2002 at monthly prices ranging from $1.89 to $2.35 per MMbtu of natural gas. The hedge contract is a derivative financial instrument and does not require deliveries of the commodity hedged. The gains or losses on the above hedge contracts will be recognized as an increase or decrease in natural gas revenues as deliveries of natural gas are made by the Company. In the case of natural gas sold by the Company pursuant to its forward sale contracts, such gains and losses will be reflected as an adjustment to the recognized price for the natural gas sold as described above. With respect to other sales of natural gas, the gains or losses will be reflected as an adjustment to the price received from such sales. Risks associated with the Company's hedge contracts -15- 16 arise primarily from the possible inability of the counterparties to meet their obligations under these contracts. The Company's existing hedge contract is secured by an irrevocable letter of credit from a major investment grade financial institution. The cash flows from future contracts are accounted for as hedges for sales of production and are classified as operating activities in the consolidated statements of cash flows. At June 30, 1997, the Company had outstanding approximately $36.5 million in 8.12% Secured Guaranteed Notes Due 2005 (the "Notes") requiring payment of interest only through June 30, 2000, at which time principal is to be amortized over the remaining life of the Notes. At June 30, 1997, the Company also had approximately $15.6 million in deferred revenue from the sale of future contract receivables that is being recognized for accounting purposes over the period during which the receivables are to be generated. During the six month period ended June 30, 1997, the Company recognized approximately $5.5 million of revenue from the previously sold receivables. The Notes and obligations under the agreement pursuant to which the Company sold the future accounts receivable are secured by substantially all of the assets of FRGC and its subsidiaries and are without recourse to Crystal Oil Company, except for certain amounts in the event of bankruptcy of FRGC and its subsidiaries. As of June 30, 1997, restricted funds of approximately $1.8 million, consisting of distributions from the trust that acquired the receivables, had been pledged to secure the obligations with respect to the Hattiesburg Sold Receivables. In addition, the Company currently has outstanding $1.5 million in an irrevocable letter of credit to support certain obligations with respect to the Notes. The Company's working capital position increased by approximately $6.8 million to approximately $68.8 million at June 30, 1997, from approximately $62.0 million at December 31, 1996, primarily as a result of the effect of the forward sale of natural gas net of the funds required for the acquisition of the DeSoto Properties and the investment of available funds in non-current marketable securities. The Company generated net cash flow from operating activities of approximately $3.8 million and $2.7 million for the six month periods ended June 30, 1997 and 1996, respectively. Pending the redeployment of the Company's available funds, the Company is investing its cash primarily in United States government and other investment grade securities. The Company believes that these securities do not present any material risks with respect to its liquidity, operations or financial position. Other Matters The Company is currently subject to various claims regarding environmental matters, which will require the expenditure of funds for legal costs and could require additional expenditure of funds for remediation if it is determined that the Company is responsible for such remediation or otherwise agrees to contribute to the cost of such remediation. It is the Company's policy to accrue for environmental remediation costs if it is probable that a liability has been incurred and an amount is reasonably estimable. The resolution of the known environmental matters affecting the Company will be subject to various factors, including the discovery of additional information with respect to the nature of contamination at the known sites, the legal responsibility -16- 17 of various parties for any cleanup obligations, the financial capability of responsible parties, the resolution of the reopening of the Company's bankruptcy proceeding and other actions by governmental agencies and private parties. Although the cost of cleanup of sites in which the Company has been notified of potential liability is currently estimated to involve the expenditure of funds by all potentially responsible parties in excess of $9 million, based on information known to the Company, the Company does not believe that its ultimate payment obligations with respect to such matters will have a material adverse impact on the Company's financial position. Statements in this Report other than historical facts are forward-looking statements made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of 1995. As such, the involved risk and uncertainties are subject to change at any time. The Company derives its forward-looking statements from its operating budgets which are based on various assumptions, including matters regarding natural gas prices, demand and supply for natural gas, changes in the market for natural gas storage and transportation, the ultimate recovery and realization of the estimated reserves of the Louisiana Property Acquisition, the success of the Company's ability to market interruptible service at the Hattiesburg Facility, the Company's successful execution of its acquisition strategy and internal operating plans, labor relations, regulatory uncertainties and legal proceedings, in particular its pending litigation with the State of Louisiana and the State of Indiana regarding environmental matters. Although the Company believes its assumptions are reasonable, it is impossible to predict the impact of certain factors that could cause actual results to differ materially from those currently anticipated. These factors are discussed in the Company's filings with the Securities and Exchange Commission, in particular its most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. -17- 18 PART II: OTHER INFORMATION Item 1. Legal Proceedings In 1995, an agency of the State of Louisiana notified the Company that the Company had potential liability under a Louisiana environmental act on account of certain activity while the Company was "owner/operator and/or owner" of a particular facility located in Louisiana from 1926 until 1935. This property had been sold by the Company in 1935. The State of Louisiana is seeking $4.5 million from all potentially responsible parties. In April 1996, the Company filed a petition to reopen the Company's 1986 bankruptcy proceeding for the sole purpose of enforcing the previous confirmation order and other orders in the bankruptcy proceeding to establish that this claim by the State of Louisiana is barred by the discharge in the Company's 1986 bankruptcy reorganization and can no longer be brought against the Company. This reopened case is now pending in the United States Bankruptcy Court for the Western District of Louisiana, Shreveport Division. The Company also referred to the Bankruptcy Court an environmental claim from another agency of the State of Louisiana concerning the environmental remediation in a 30 acre tract of land that the Company previously owned and on which a fuel oil refinery was operated from 1920 until 1940. In October 1996, the Bankruptcy Court entered an order barring the State of Louisiana from asserting claims against the Company concerning the fuel oil refinery site on the grounds that such claims had accrued prior to the Company's 1986 bankruptcy. This order was recently affirmed by the United States District Court for the Western District of Louisiana in an appeal by the State of Louisiana. On April 9, 1997, the State of Louisiana proceeded to appeal the District Court's decision to the United States Court of Appeals for the Fifth Circuit where the matter is currently pending. In 1991, the Company was named, among others, as a potentially responsible party ("PRP") for environmental clean-up by an agency of the State of Indiana and received an informational request concerning the Company's activities at a site located in Indiana. A now dissolved subsidiary of the Company owned a refinery on this site for a period of approximately four years during the 1970s. Except for such period, other parties have owned and engaged in operations of this site since the construction of the refinery in 1946. In 1996, the State of Indiana brought an action against the Company and others to recover approximately $1.8 million in remediation costs that was alleged to have been incurred by it from 1990 through 1994 for the environmental clean-up of this site. The Company has referred this claim to the Bankruptcy Court for the Western District of Louisiana on the basis that such claim is barred as a result of the Company's 1986 bankruptcy proceeding. In another environmental matter, the Company is among a number of defendants in a suit pending in the 14th District Court in Calcasieu Parish, Louisiana, by the H. C. Drew Estate for remediation of alleged saltwater damage and pit cleanup at a drilling location near Lake Charles, Louisiana, in which the plaintiff asserts that the Company has a 25% working interest ownership in a leasehold interest relating to the location. Reunion Energy ("Reunion") was the operator for the drilling operations at the site and primarily responsible for the cleanup of the site under the terms of the Company's operating agreement with Reunion. The Company, however, may be responsible under the operating agreement for its pro rata share of certain cleanup costs. The amount of the -18- 19 plaintiff's claim is presently not known. The plaintiff, however, has estimated an environmental cleanup cost of $3.0 million based on the process of removing and replacing the soil at the site. Reunion had advised the Company that it believes that the plaintiff's proposed cleanup is neither required under the operating agreement or by law. Reunion has proposed to follow the environmental remediation requirements under the regulations of the State of Louisiana that would require surface remediation through the treatment of salt water contamination at a cost that would be expected to be substantially less than the amount under the plaintiff's proposal. Reunion's proposal has been referred to the Office of Conservation of the Louisiana Department of Natural Resources for a determination. Presently, the Company is investigating this matter. However, based on information currently known to the Company, the Company does not expect that the resolution of this matter will have a material adverse effect on its financial condition. In July 1979, a suit styled "AGB Oil Company et al vs. The Charter Company, Charter Oil Company, and Crystal Exploration and Production Company", was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida. The plaintiff is the limited partner of Caloosa 1974 Limited Partnership, a Colorado limited partnership, of which a subsidiary of the Company, Crystal Exploration and Production Company (formerly Charter Exploration and Production Company), is the general partner. The plaintiff claims compensatory damages of $10 million, punitive damages in an undetermined amount, interest and costs of litigation. The suit alleges breach of contract, breach of fiduciary duty, mismanagement and fraud in connection with the operation of Caloosa 1974 Limited Partnership. In recent years, the suit has been generally inactive. However, in 1996 the plaintiff amended its complaint and added Crystal Oil Company as a defendant to the lawsuit. In response, the Company referred this claim to the Bankruptcy Court for the Western District of Louisiana based on the consideration that such claim was barred in the Company's 1986 bankruptcy proceeding. The Company and plaintiff agreed to a stand down period through October 31, 1997, as extended, with respect to the proceedings in Bankruptcy Court pending the results of a mediation process between the parties. The Company does not believe that a recovery by Plaintiff of a material amount is likely. As in the case of the fuel oil refinery site in Louisiana, the Company intends to pursue in Bankruptcy Court its position that the other claim against the Company by the State of Louisiana and the claims of the State of Indiana are barred by reason of orders entered in its previous bankruptcy proceeding and has filed motions in the Bankruptcy Court requesting such a ruling. In the litigation with AGB, the Company will continue the proceedings in Bankruptcy Court if the mediation process between the parties fails to provide satisfactory results. In light of the foregoing matters, the Company accrued an additional $1.0 million during the second quarter of 1997 for defense and other related costs of such matters. Because the forgoing matters relate to matters existing prior to the Company's quasi-reorganization in 1986, this accrual was recorded net of related tax impact as an offset to additional paid-in capital. -19- 20 Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders was held on May 29, 1997, in New York, New York. Two proposals were submitted to shareholders as described in the Company's Proxy Statement dated April 24, 1997, and were voted upon and approved by shareholders at the meeting. The table below briefly describes the proposals and results of the shareholders votes. Votes in Votes Favor Withheld/Against --------- ---------------- Election of six directors: J. N. Averett, Jr. 2,644,610 4,723 George P. Giard, Jr. 2,644,861 4,472 Gary S. Gladstein 2,644,201 5,132 Robert B. Hodes 2,644,801 4,532 Donald G. Housley 2,644,801 4,532 Lief D. Rosenblatt 2,644,861 4,472 Votes in Votes Favor Against Abstain --------- ------- ------- Proposal for ratification of appointment of independent auditors 2,645,730 3,200 403 There were no broker non votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits *10 Natural Gas Inventory Forward Sale Contract dated June 6, 1997, between Crystal Gas L. L. C. and The Chase Manhattan Bank. *11 Computation of Earnings Per Common Share. 27 Financial Data Schedule (b) Reports on Form 8-K None - ----------------------- * Filed herein -20- 21 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, on the 8th day of August 1997. CRYSTAL OIL COMPANY BY: /S/ J. N. AVERETT, JR. ------------------------------------ J. N. Averett, Jr. President and Director (Principal Executive Officer) BY: /S/ J. A. BALLEW ------------------------------------ J. A. Ballew Senior Vice President, Treasurer, and Chief Financial Officer BY: /S/ PAUL E. HOLMES ------------------------------------ Paul E. Holmes Vice President/Controller (Principal Accounting Officer) -21- EX-10 2 NATURAL GAS INVENTORY FORWARD SALE CONTRACT 1 EXHIBIT 10 NATURAL GAS INVENTORY FORWARD SALE CONTRACT DATED JUNE 6, 1997 BETWEEN CRYSTAL GAS L.L.C. AND THE CHASE MANHATTAN BANK 2 NATURAL GAS INVENTORY FORWARD SALE CONTRACT This NATURAL GAS INVENTORY FORWARD SALE CONTRACT (this "Agreement") is entered into as of June 6, 1997 between CRYSTAL GAS L.L.C., a limited liability company organized under the laws of the State of Louisiana (the "Seller"), and The Chase Manhattan Bank, a New York state banking corporation (the "Purchaser"). WHEREAS, Seller has recently purchased certain oil and gas properties located in DeSoto Parish, Louisiana and, together with its affiliates, is engaged in the acquisition, storage and sale of natural gas, and desires to sell to Purchaser certain quantities of natural gas currently owned or to be produced or acquired by Seller on the terms and conditions set forth herein to refinance the acquisition and fund the future development of those properties; and WHEREAS, Seller desires to sell and Purchaser desires to purchase certain quantities of Natural Gas on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the respective covenants and agreements of the parties hereinafter set forth and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties, the parties hereby agree as follows: ARTICLE I - INTERPRETATION Section 1.01 Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated: "Accelerated Termination Date" shall have the meaning ascribed thereto in Section 6.02(b). "Applicable Instruments" of any Person shall mean the Certificate or Articles of Incorporation or the Certificate and Memorandum of Association, by-laws and other organizational documents of such Person and all contracts, indentures, agreements, instruments and documents to which such Person is a party or by which such Person or any assets of such Person may be bound or affected. "Btu" means the amount of energy required to raise the temperature of one pound of pure water one degree Fahrenheit from 59 degrees Fahrenheit to 60 degrees Fahrenheit. "Business Day" means a day, other than a Saturday or a Sunday, on which commercial banks are not authorized or required to be closed in New York, New York. "Confirmation Letter" have the meaning ascribed thereto in Section 2.01. "Deficiency Quantity" means, in respect of a particular Delivery Month, the amount by which the Required Delivery Quantity of Natural Gas for that Delivery Month exceeds the quantity of Natural Gas actually delivered and received hereunder in respect of such Delivery Month. "Delivery Month" means each calendar month commencing with the month of September, 1997 through and including the month of December, 2002. 1 3 "Delivery Point" means a delivery point at the Texas Eastern Pipeline, East Texas - Pool, or if the terms of Section 2.05(b) are satisfied, any of the following locations: (i) Tennessee Gas Transmission, Zone 1, (ii) Transco Pipeline (Upstream of Station 65) Zone 4, or (iii) Henry Hub. "Early Termination Date" shall have the meaning ascribed thereto in Section 5.02. "Event of Change" shall have the meaning ascribed thereto in Section 6.01. "Event of Default" shall have the meaning ascribed thereto in Section 5.01. "Federal Funds Rate" means, for any day, a fluctuating interest rate per annum equal for such day to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Purchaser from three Federal funds brokers of recognized standing selected by Purchaser. "Force Majeure" shall mean a failure by either party to perform obligations hereunder, except for the obligation to make payment due hereunder, to the extent that such failure is caused by war, riots, insurrections, fires, explosions, sabotage, strikes and other labor or industrial disturbances, acts of God or the elements, government laws, regulations or requests, disruption or breakdown of production or transportation facilities, failures of transporters in receiving and delivering natural gas tendered, compliance with OFO's or other similar notice from a transporter, or by any other cause reasonably beyond the control of such party, but does not include the failure to perform obligations solely as a result of the fact that to do so will result in economic loss or hardship to such party. "Governmental Requirement" shall mean all judgments, orders, writs, injunctions, decrees, awards, laws, ordinances, statutes, regulations, rules, franchises, permits, certificates, licenses, authorizations and the like of any government or any commission, board, court, agency, instrumentality or political subdivision thereof. "Guarantor" shall mean Crystal Oil Company, a Louisiana corporation. "Guaranty Agreement" shall mean that certain Guaranty Agreement dated of even date herewith by Guarantor, in favor of Purchaser. "Henry Hub" means the Sabine Pipe Line Company pipeline facilities at Texaco Inc.'s Henry Gas Processing Plant near Erath, Louisiana. "Margin Agreement" means the Margin Agreement of even date herewith between Seller and Purchaser, as the same may be modified or amended from time to time. "MMBtu" means one million Btus. "Natural Gas" means a mixture of gaseous hydrocarbons consisting primarily of methane and meeting the quality standards and specifications required pursuant to Section 2.02. "NYMEX" means the New York Mercantile Exchange, Inc. and any successor thereto by merger, consolidation, or sale of assets. 2 4 "OFO" shall have the meaning given such term in Section 2.06(c). "Payment Date" shall mean the 20th day of each month commencing on October 20, 1997. "Person" shall mean any individual, corporation, company, partnership, joint venture, trust, unincorporated association, government or any commission, board, court, agency, instrumentality or political subdivision thereof, any other entity or any trustee, receiver, custodian or similar official. "Prepaid Price" shall be the amount set forth in the Confirmation Letter. "Reference Dealer" means a leading company in the natural gas marketing business selected by Purchaser in good faith from among companies whose credit standings satisfy all the criteria that Purchaser applies generally with respect to transactions similar to those contemplated by this Agreement. "Replacement Value" means (i) if Seller is the party which has failed to perform, the price which Purchaser, acting in good faith and at arm's length, actually pays, or has contracted to pay, for Natural Gas to replace the Deficiency Quantity at the agreed Delivery Point plus any additional transportation and other costs and expenses incurred by Purchaser in connection with the purchase of such Natural Gas, and (ii) if Purchaser is the party which has failed to perform, the price which Seller, acting in good faith and at arm's length, actually receives, or has contracted to receive, for the sale of the Deficiency Quantity at the agreed Delivery Point less any additional transportation and other costs and expenses incurred by Seller in connection with the sale of such Natural Gas. "Required Delivery Quantity" means the amount of MMBtus of Natural Gas to be delivered and received during a given Delivery Month pursuant to this Agreement as agreed upon in the Confirmation Letter. "Taxes" means all ad valorem, property, occupation, severance, production, gathering, pipeline, utility, gross production, sales, use, excise, transaction and any other governmental charges and assessments, other than taxes based on net income or net worth. "Termination Date" means either the Accelerated Termination Date or the Early Termination Date, as the case may be. "Termination Payment" shall have the meaning given such term in Section 5.03. "United States Dollars", "U.S. Dollars", or "U.S. $" means the lawful currency of the United States of America in immediately available funds. "Unpaid Amounts" means, with respect to any Termination Date, the aggregate of all amounts that became payable (whether or not due) to Purchaser hereunder prior to the occurrence of such Termination Date and that remain payable (whether or not due) as at such Termination Date, together with interest thereon from (and including) the date such amounts became due and payable to (but excluding) such Termination Date at the U.S. Base Rate. "U.S. Base Rate" means, at any time, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the highest of: (a) the rate of interest announced publicly by The Chase Manhattan Bank in New York, New York, from time to time, as its prime commercial lending rate; or (b) one percent per annum above the Federal Funds Rate in 3 5 effect from time to time. In the event there is any Unpaid Amount, Purchaser will use reasonable efforts to inform Seller of changes in the U.S. Base Rate promptly upon the occurrence of such changes. Section 1.02 Headings. The division of this Agreement into Articles and Sections and the insertion of an index and headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article, Section, paragraph, Schedule or other portion hereof and include any agreement supplemental hereto. Unless something in the subject matter or context is inconsistent therewith, references herein to Articles, Sections and paragraphs are to Articles, Sections and paragraphs of this Agreement. Section 1.03 Number. Words importing the singular number shall include the plural and vice versa, and words importing the masculine gender shall include the feminine and neuter genders and vice versa. Section 1.04 Non-Business Days. Whenever any action to be taken hereunder shall be stated to be required to be taken or any payment to be made hereunder shall be stated to be due on a day other than a Business Day, unless otherwise specifically provided for herein, such payment shall be made or such action shall be taken on the next succeeding Business Day if the due date was a Sunday or a NYMEX or New York bank holiday which occurs on a Monday or on the last preceding Business Day if the due date was a Saturday or a NYMEX or New York bank holiday other than a Monday, and in the case of the payment of any monetary amount, the extension or curtailment of time shall be taken into account for the purposes of computation of interest or fees thereon. ARTICLE II - SALE AND PURCHASE OF NATURAL GAS Section 2.01 Sale and Purchase of Natural Gas. (a) On or before June 6, 1997, Purchaser and Seller shall agree upon and execute a letter described in this Section 2.01 (such letter being the "Confirmation Letter"). The Confirmation Letter shall specify a mutually acceptable Prepaid Price (which shall be approximately U.S. $30,000,000), the date or dates on which the Prepaid Price shall be paid, and for each Delivery Month, the Delivery Point, the Required Delivery Quantity, and the proportion thereof to be delivered and received at the Delivery Point, each as mutually agreed by Purchaser and Seller. On the date or dates specified for such purpose in the Confirmation Letter, Purchaser shall pay to Seller the Prepaid Price by wire transfer of immediately available funds to such account or accounts as Seller may designated in writing, provided that the conditions precedent set out in Annex 1 have been satisfied by Seller and no Event of Default or Event of Change shall have occurred. (b) In consideration of the payment to Seller of the Prepaid Price, Seller hereby agrees to sell and deliver, or cause to be delivered, to Purchaser or to its account in each Delivery Month, at the Delivery Point, the Required Delivery Quantity of Natural Gas on the terms and conditions set forth in this Agreement; and Purchaser hereby agrees to accept delivery of such Natural Gas. Payment of the Prepaid Price on the date or dates set forth in the Confirmation Letter shall constitute payment in full of the purchase price of all quantities of Natural Gas to be delivered hereunder. Section 2.02 Measurement and Quality. Natural Gas delivered to a specific Delivery Point hereunder shall be measured by the operator of the Delivery Point in accordance with its standard practices. All such Natural Gas shall meet or exceed the requirements of Purchaser's transporter receiving gas at the Delivery Point, including, without limitation, requirements of quality, composition, temperature and pressure. 4 6 Section 2.03 Delivery and Receipt of Natural Gas. (a) Seller agrees to deliver to Purchaser, and Purchaser agrees to accept delivery from Seller in each Delivery Month at the Delivery Point determined pursuant to this Agreement, the Required Delivery Quantity of Natural Gas required to be delivered under the Confirmation Letter in such Delivery Month. (b) Seller and Purchaser shall take such action as shall be necessary to properly schedule the delivery and receipt of such Natural Gas at the Delivery Point in each Delivery Month in compliance with all rules, regulations and procedures applicable at the Delivery Point. (c) Each Delivery Month, Seller shall arrange for delivery, and Purchaser shall arrange for receipt, of Natural Gas to begin at the Delivery Point no later than the first day of the Delivery Month and to be completed no later than the last calendar day of the Delivery Month. All deliveries and receipts shall be at hourly and daily rates that are as uniform as possible over the course of the Delivery Month in accordance with generally accepted pipeline scheduling practices. Section 2.04 Payment of Fees. Seller shall obtain and pay all costs in connection with transportation of the Natural Gas to the Delivery Point and Purchaser shall obtain and pay all costs in connection with transportation of the Natural Gas from the Delivery Point. Seller shall be responsible for the payment of all hub fees (whether charged to Seller or Purchaser) payable in connection with delivery of Natural Gas hereunder at the Delivery Point. Seller shall not be responsible for any insurance, storage, transportation or other costs in respect of the period after title to any Natural Gas delivered hereunder has passed to Purchaser in accordance with Section 2.08 of this Agreement. Purchaser shall not be responsible for any insurance, storage, transportation or other costs in respect of the period prior to the time title to any Natural Gas delivered hereunder has passed to Purchaser in accordance with Section 2.08 of this Agreement. Section 2.05 Delivery Points upon Force Majeure; Alternate Delivery Points. (a) Seller is obligated to deliver to Purchaser and Purchaser is obligated to receive from Seller, at the Delivery Point, the Required Delivery Quantity of Natural Gas in accordance with the terms and conditions of this Agreement. If as the result of a Force Majeure, either (i) Seller is unable, after using all reasonable business efforts, to deliver the Required Delivery Quantity of Natural Gas to Purchaser at the Delivery Point in the proportions agreed upon pursuant to this Agreement or (ii) Purchaser is unable, after using all reasonable business efforts, to receive the Required Delivery Quantity of Natural Gas from Seller at the Delivery Point in the proportions agreed upon pursuant to this Agreement, then Seller shall be obligated to deliver and Purchaser shall be obligated to receive, the relevant Required Delivery Quantity of Natural Gas at a mutually acceptable comparable delivery point or points with mutually acceptable adjustments for quality and location. (b) Seller may elect to deliver Natural Gas at an alternate delivery point other than the Texas Eastern Pipeline, East Texas - Pool which alternate delivery point may be any of the following locations: (i) Tennessee Gas Transmission, Zone 1, (ii) Transco Pipeline (Upstream of Station 65) Zone 4 or (iii) Henry Hub; provided that Seller has given Purchaser written notice of its election no later than five (5) Business Days before the end the calendar month preceding the Delivery Month in which it proposes to make delivery at such alternate delivery point. If there is transportation cost differential associated with delivery of such Natural Gas at such alternate delivery point (as measured against delivery at the Texas Eastern Pipeline, East Texas - Pool), Purchaser shall prepare and deliver to Seller, within five (5) Business Days after the end of the applicable Delivery Month a certificate setting out the calculation of 5 7 the transportation cost differential accompanied by reasonably available back-up documentation therefor. Any such certificate shall, absent manifest error, be conclusive evidence of the amount of such transportation cost differential. If Seller owes Purchaser compensation pursuant to this Section 2.05(b), Seller shall pay Purchaser such amount within five (5) Business Days following its receipt of Purchaser's certificate. If Purchaser owes Seller compensation pursuant to this Section 2.05(b), Purchaser shall pay Seller amount on the next succeeding Payment Date. (c) During any Delivery Month, Seller may elect to deliver Natural Gas in excess of the Required Delivery Quantity for such Delivery Month by giving Purchaser not less than two (2) Business Day's prior written notice; provided that Purchaser may decline to accept such excess volumes if it determines, in its sole discretion, that no readily available market exists for such excess volumes, that such volumes are too small to be readily marketed or that it is uneconomical for it to accept such excess volumes. If Purchaser wishes to decline Seller's election, it shall give Seller written notice within one (1) Business Day of its receipt of Seller's notice. If Purchaser accepts Seller's election, the excess volume so delivered shall be allocated on a pro rata basis to reduce the Required Delivery Quantity for each of the remaining Delivery Months, commencing on the next succeeding Delivery Month. Purchaser shall promptly furnish to Seller an amendment to the Confirmation Letter evidencing such new Required Delivery Quantities. Section 2.06 Failure of Delivery or Receipt; Transportation and Balancing. (a) (i) Without prejudice to Articles V and VI, if as a result of an event of Force Majeure, Seller is unable to meet its delivery obligation in respect of a Delivery Month at the Delivery Point or at a mutually satisfactory comparable delivery point or points (in which case Seller shall be deemed the "Responsible Party"), then Seller shall pay to Purchaser, as liquidated damages, the Replacement Value of the Deficiency Quantity of Natural Gas in respect of that Delivery Month. The Replacement Value shall be paid to Purchaser no later than the Payment Date next following such Delivery Month, and Purchaser will accept such payment in lieu of Natural Gas not delivered in such Delivery Month. Where Seller is unable to meet its acceptance obligation as aforesaid, Purchaser shall use all reasonable efforts to minimize the Replacement Value of any Deficiency Quantity. If the Replacement Value is based on the price Purchaser pays to replace the Deficiency Quantity, Purchaser shall prepare and deliver to Seller, within 5 Business Days after the end of the applicable Delivery Month, a certificate setting out the calculation of the Replacement Value accompanied by reasonably available back-up documentation therefor. Any such certificate shall, absent manifest error, be conclusive evidence of the amount due in respect of the Replacement Value. Purchaser shall notify Seller as soon as possible of any anticipated inability to perform all or any portion of its obligations hereunder. (ii) Without prejudice to Article VI, if as a result of an event of Force Majeure, Purchaser is unable to meet its obligation to accept delivery in respect of a Delivery Month at the Delivery Point or at a mutually satisfactory comparable delivery point or points (in which case Purchaser shall be deemed the "Responsible Party"), then Seller shall pay to Purchaser, in lieu of delivery of the Required Delivery Quantity, the Replacement Value of the Deficiency Quantity of Natural Gas in respect of that Delivery Month. The Replacement Value shall be paid to Purchaser no later than the Payment Date next following such Delivery Month, and Purchaser will be required to accept such payment in lieu of Natural Gas not delivered in such Delivery Month. Where Purchaser is unable to meet its acceptance obligation as aforesaid, Seller shall use all reasonable efforts to maximize the Replacement Value of any Deficiency Quantity. If the Replacement Value is based on the price Seller receives for the Deficiency Quantity, Seller shall prepare and deliver to Purchaser, within 5 Business Days after the end of the applicable Delivery Month, a certificate setting out the calculation of the Replacement Value accompanied by reasonably available back-up documentation therefor. Any such certificate shall, absent 6 8 manifest error, be conclusive evidence of the amount due in respect of the Replacement Value. Purchaser shall notify Seller as soon as possible of any anticipated inability to perform all or any portion of its obligations hereunder. (b) In the event that (i) Seller or Seller's transporter inadvertently delivers more or less than the Required Delivery Quantity for any Delivery Month, or (ii) Purchaser or Purchaser's transporter inadvertently receives more or less than the Required Delivery Quantity for any Delivery Month, such overages or underages shall be corrected or adjusted in cash or Natural Gas as the parties may agree or in accordance with applicable tariff provisions; and the Responsible Party will be liable to the other party for any associated pipeline penalties or cashouts. Each party shall notify the other as promptly as possible of any changes in its rate of delivery or receipt of Natural Gas at the Delivery Point and take all reasonable actions necessary to avoid the incurrence of pipeline penalties and imbalances. (c) Should either party receive an operational flow order ("OFO") or other order or notice from a transporter requiring action to be taken in connection with this Agreement or Natural Gas flowing under this Agreement, such party shall immediately notify the other party of the OFO and promptly provide the other party a copy of same by facsimile. The parties shall take all actions required by the OFO within the time prescribed therein. Each party shall indemnify, defend and hold harmless the other party from any damages or liability, including, without limitation, all non-compliance penalties and attorneys' fees, associated with an OFO (i) of which the indemnifying party failed to give the indemnified party the notice required hereunder or (ii) under which the indemnifying party failed to take the action required by the OFO within the time prescribed therein. (d) If a party is unable to perform any of its obligations to deliver or receive gas hereunder as a result of an event of Force Majeure, such party shall give notice and full particulars of such event of Force Majeure to the other party as soon as reasonably possible and shall take all reasonable actions necessary to remedy the event of Force Majeure. Section 2.07 Exclusive Remedy. It is expressly agreed, except as provided in Sections 5.02, 5.03, 6.02 and 6.03, that payments made in accordance with Section 2.06 hereof shall constitute the exclusive remedies available to Seller and Purchaser for nondelivery, nonacceptance, over-delivery or over-acceptance of Natural Gas. To the fullest extent permitted by applicable law, neither party shall be liable for any punitive, exemplary, incidental, consequential, indirect or direct (other than as set forth in Section 2.06) or other damages, in tort, contract or otherwise in respect thereof. Section 2.08 Possession, Title and Risk. Possession of and title to Natural Gas delivered pursuant hereto shall pass from Seller to Purchaser at the Delivery Points when the Natural Gas is accepted by the pipeline for transport for Purchaser's account and is recorded by the proper metering device. Until such time, Seller shall be deemed to be in control and possession of, have title to and be responsible for such Natural Gas and, after such time, Purchaser shall be deemed to be in control and possession of, have title to and be responsible for such Natural Gas. Section 2.09 Royalties. Seller shall at all times have the obligation to make settlements for all royalties and payments to mineral and royalty owners and all other Persons having an ownership interest in the Natural Gas delivered by Seller to Purchaser hereunder. Seller hereby agrees to indemnify Purchaser and save it harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any and all Persons in respect of royalties, taxes, license fees or charges thereon which are applicable before the title passes to Purchaser or which may be levied and assessed upon Seller in respect of a sale of the Natural Gas to Purchaser. 7 9 Section 2.10 Taxes. Seller is liable for and shall pay, cause to be paid or reimburse Purchaser if Purchaser shall have paid, all Taxes applicable to the Natural Gas sold hereunder prior to the time title to the Natural Gas has passed to Purchaser, unless allocated to Purchaser as hereinafter provided. Purchaser is liable for and shall pay, cause to be paid or reimburse Seller if Seller shall have paid, all Taxes applicable to the Natural Gas sold hereunder at or after the time title to the Natural Gas has passed to Purchaser, applicable to the sale hereunder as a result of any subsequent sale or use of the Natural Gas by Purchaser, or imposed on or collected from Purchaser by law. Both parties shall use reasonable efforts to administer this Agreement and implement the provisions in accordance with their intent to minimize Taxes. Purchaser represents that it is engaged in the business of reselling the Natural Gas delivered under this Agreement and Purchaser is purchasing the Natural Gas for resale to third parties, and accordingly Purchaser is entitled to purchase the Natural Gas hereunder free of any Taxes. Purchaser shall provide Seller with a certificate of exemption or other reasonably satisfactory evidence of exemption promptly after execution of this Agreement. For each Delivery Month during the term of this Agreement, Purchaser shall provide Seller appropriate evidence that the Required Delivery Quantity of Natural Gas was resold to a third party in accordance with the sale for resale exemption under applicable state law. Each party agrees to cooperate with obtaining any exemption from or reduction of Tax upon request by the other party. Section 2.11 No Warranty. PURCHASER ACKNOWLEDGES THAT IT HAS ENTERED INTO THIS AGREEMENT AND IS CONTRACTING FOR THE NATURAL GAS TO BE SUPPLIED BY SELLER BASED SOLELY UPON THE EXPRESS COVENANTS, REPRESENTATIONS AND WARRANTIES HEREIN SET FORTH (including Section 2.02) AND, SUBJECT TO SUCH COVENANTS, REPRESENTATIONS AND WARRANTIES (including Section 2.02), ACCEPTS SUCH NATURAL GAS "AS IS, WHERE IS" AND "WITH ALL FAULTS." ARTICLE III - REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of Seller. Seller represents and warrants to Purchaser as follows: (a) Status and Authority. Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has all requisite power and authority to own its properties, to conduct its business as conducted at present and to execute, deliver and perform this Agreement. (b) Power and Authority. The execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated by this Agreement are within Seller's power and authority and have been duly authorized by all necessary action. (c) Consents, Approvals, Etc.. No authorization, consent or approval of, or other action by, or notice to or filing with, any governmental authority, regulatory body or any other Person is required for the due authorization, execution, delivery or performance by Seller of this Agreement, or the consummation of the transactions contemplated by this Agreement, except those approvals which have been obtained, and those notices and filings which have been made, copies of all of which have been delivered to Purchaser. (d) Execution and Delivery. This Agreement has been duly executed and delivered to Purchaser by Seller and is the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms except as the enforceability thereof may be limited by the effect of any 8 10 applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general principles of equity. (e) Compliance with Laws. Neither the execution, delivery and performance by Seller of this Agreement nor the consummation of the transactions contemplated by this Agreement (1) does or will violate any provision of any Applicable Instrument of Seller or any Governmental Requirement or (2) does or will result in or require the creation or imposition of any lien on any properties, assets or revenues of Seller. Seller is in compliance in all material respects with the Applicable Instruments of Seller and all Governmental Requirements applicable to Seller. (f) Investment Company. Seller is not an "investment company" subject to regulation under the Investment Company Act of 1940, as amended. (g) Public Utility Holding Company. Seller is not, or is not subject to regulation as, a "holding company," a "subsidiary company" of a "holding company," an "affiliate" of a "holding company," or an affiliate" of a "subsidiary company" of a "holding company," in each case as such term is defined in the Public Utility Holding Company Act of 1935, as amended. (h) Ownership of Natural Gas. The Natural Gas to be delivered by Seller to Purchaser hereunder shall be delivered to Purchaser with good and marketable title thereto, free and clear of all liens, encumbrances or any other adverse claims whatsoever, including royalties and Taxes for which Seller is responsible under Sections 2.09 and 2.10. (i) Commercial Purpose. Seller has entered into this transaction for commercial purposes related to its business as a producer, processor, or merchandiser of Natural Gas or natural gas liquids. Seller has the capability, and intends, to make delivery of the Natural Gas to be delivered hereunder. Seller is selling the Natural Gas in the ordinary course of business. Seller is also acting as a principal and not as an agent, understands and acknowledges that the Purchaser has been and will be acting only on an arm's length basis and not as its agent, broker, advisor or fiduciary in any respect, is relying solely upon its own evaluation of this Agreement and the transactions contemplated hereby (including the present and future results, consequences, risks and benefits thereof, whether financial, accounting, tax, legal or otherwise) and upon advice from its own professional advisors, understands this Agreement and the transactions contemplated hereby and the risks associated therewith, has determined that those risks are appropriate for it, and is willing to assume those risks, and has not relied and will not be relying upon any evaluation or advice (including any recommendation, opinion or representation) from Purchaser or its affiliates or the representatives or advisors of Purchaser or its affiliates. Section 3.02 Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller as follows: (a) Corporate Status and Authority. Purchaser is a company incorporated under the laws of the State of New York and has all necessary corporate power and authority to carry on its business as now being conducted by it. Purchaser has full power and authority to enter into this Agreement and to do all acts and things and execute and deliver all other documents as are required hereunder to be done, observed or performed by it in accordance with the terms hereof. (b) Valid Authority. Purchaser has taken all necessary corporate action to authorize the creation, execution, delivery and performance by it of this Agreement and for it to observe and perform the provisions of this Agreement in accordance with its terms. 9 11 (c) Validity of Documents and Enforceability. This Agreement constitutes a valid and legally binding obligation of Purchaser enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity. Neither the execution and delivery of this Agreement nor compliance with the terms and conditions hereof by Purchaser (i) will result in a violation of the terms of any Applicable Instrument of Purchaser or (ii) requires any approval or consent of any governmental authority or agency having jurisdiction except such as has already been obtained. (d) Commercial Purpose. Purchaser has entered into this transaction for commercial purposes related to its business as conjunction with its line of business and not for speculative purposes. Purchaser has the capacity, and intends, to take delivery of the Natural Gas to be delivered hereunder. Purchaser is acquiring the Natural Gas in the ordinary course of business. ARTICLE IV - COVENANTS Section 4.01 Affirmative Covenants of Seller. Seller covenants and agrees with Purchaser that so long as any obligation of Seller to deliver Natural Gas or to make any payment is outstanding hereunder: (a) Compliance with Laws, etc.. Seller will comply with all Governmental Requirements applicable to the performance of Seller's obligations hereunder, except where noncompliance therewith would not have a material adverse effect on Seller. Seller will comply in all material respects with the Applicable Instruments of Seller. (b) Notice of Event of Default. Seller shall notify Purchaser of the occurrence of any event which with the passage of time or the giving of notice, or both, would be an Event of Default or an Event of Change promptly after becoming aware of the same. (c) Qualification. Seller will be duly qualified to do business as a foreign corporation and will be in good standing under the laws of all jurisdictions in which the failure to be so qualified could have a material adverse effect on Seller by or before the first Delivery Month. ARTICLE V - EVENTS OF DEFAULT AND EARLY TERMINATION Section 5.01 Events of Default. Each of the following events shall constitute an "Event of Default" by Seller under this Agreement: (a) Seller shall (i) fail to deliver the Required Delivery Quantity of Natural Gas to the Delivery Point in accordance with the terms of this Agreement, and (ii) if such failure is the result of an event of Force Majeure, fail to make a payment of the Replacement Value in respect thereof in accordance with the provisions of Section 2.06(a) and such failure is not remedied within one (1) Business Day; or (b) Seller shall fail to pay any amounts due to Purchaser in accordance with the terms of Section 2.05(b) of this Agreement and such failure is not remedied within one (1) Business Day after the Business Day on which such payment is due; or (c) Seller shall fail to perform or observe any material term, covenant or agreement herein contained on its part to be performed or observed (other than any term, covenant or agreement whose 10 12 breach or default in performance is specifically dealt with elsewhere in this Section 5.01) and such failure shall remain unremedied for thirty (30) days after notice thereof to Seller by Purchaser; or (d) Seller shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Seller seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property, and in the case of any such proceeding instituted against it (but not yet instituted by it), shall remain undismissed or unstayed for a period of sixty (60) days or Seller shall take any corporate action to authorize any of the actions set forth above in this Section 5.01(d); or (e) any representation or warranty made by Seller in this Agreement shall prove to have been incorrect in any material respect when made or when deemed made; or (f) Seller shall fail to deliver Margin (as defined in the Margin Agreement) in accordance with its obligations under the second sentence of Section 2 of the Margin Agreement and such failure is not remedied within one (1) Business Day after notice of such failure is given to Seller by Purchaser; or (g) Seller shall fail to perform or observe any term, covenant or agreement (other than with respect to its obligations under the second sentence of Section 2 thereof) contained in the Margin Agreement on its part to be performed or observed and such failure is not remedied within thirty (30) days notice thereof to Seller by Purchaser; or (h) an Event of Default under the Guaranty Agreement shall occur and be continuing. Section 5.02 Early Termination by Purchaser. If at any time an Event of Default has occurred and is continuing, Purchaser may, by not more than five (5) Business Days notice to Seller specifying the relevant Event of Default, designate a Business Day not earlier than the Business Day such notice is effective as an early termination date ("Early Termination Date"); provided, however, that if an Event of Default pursuant to Section 5.01(d) shall have occurred, the Early Termination Date shall occur immediately on the occurrence of such Event of Default without the need for Purchaser to give any prior notice. Upon the designation or occurrence of an Early Termination Date, the obligation of Seller to make any further deliveries of Natural Gas to Purchaser under this Agreement shall terminate and Seller shall pay to Purchaser the Termination Payment together with any Unpaid Amounts. All amounts payable under this Section 5.02 shall become due on the Early Termination Date and shall be payable on the Business Day immediately following delivery by Purchaser of the statement required pursuant to Section 5.03(c). Such amount will be paid, together with (to the extent permitted by applicable law) interest thereon (before as well as after judgment) from (and including) the Early Termination Date to (but excluding) the date such amount is paid, at the rate specified in Section 7.02. The parties agree that the Termination Payment is a reasonable pre-estimate of the damages which would be incurred by Purchaser as a result of an Event of Default and not a penalty. Section 5.03 Calculation of Termination Payment. (a) "Termination Payment" shall be the lowest amount determined on the basis of quotations from at least four Reference Dealers as the amount that would have been payable on the Termination Date by Purchaser in consideration of an agreement between Purchaser and the quoting Reference 11 13 Dealer, and subject to such documentation evidencing agreement on price as they may in good faith agree, with the relevant Termination Date as the date of commencement of such agreement that would have the effect of preserving for Purchaser the equivalent of the delivery obligations that, but for the occurrence of the relevant Termination Date, Seller would have been obligated to perform hereunder after such Termination Date. Purchaser will request each Reference Dealer to provide its quotation to the extent practicable as of the same time (without regard to different time zones) on the relevant Termination Date (or, if a Termination Date is deemed to occur, as of a time as soon thereafter as practicable). The time as of which such quotations are to be provided will be selected in good faith by Purchaser. (b) If the Termination Payment cannot be determined in accordance with Section 5.03(a), "Termination Payment" shall be an amount equal to the total amount required, as determined as of the relevant Early Termination Date by Purchaser in good faith, to compensate it for its direct actual losses and costs (including loss of bargain and reasonable legal fees and other out-of-pocket expenses) that it may incur as a result of the early termination of Seller's delivery obligations hereunder, including, without limitation, any damages, losses, or expenses incurred in obtaining, terminating, liquidating, reestablishing or employing hedges or related trading positions against Purchaser's position hereunder. (c) On or as soon as reasonably practicable following the occurrence of a Termination Date, Purchaser will calculate the Termination Payment and will provide Seller with a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations) and (2) giving details of the relevant account to which the Termination Payment is payable. Any such statement shall, absent manifest error, be conclusive evidence of the amount due in respect of the Termination Payment. ARTICLE VI - EVENTS OF CHANGE AND ACCELERATED TERMINATION Section 6.01 Events of Change. Each of the following events shall constitute an "Event of Change" for the purposes of this Agreement: (a) the enactment, promulgation, execution or ratification of, or any change in or amendment to, any regulation or law (or the application or interpretation of any regulation or law, as determined by a court or regulatory authority of competent jurisdiction or as determined by the opinion of independent counsel mutually acceptable to Seller and Purchaser) that occurs after the date hereof which would result in the imposition of a Tax (other than an increase in the rate of a general tax on overall income) or of state or federal government royalties (in excess of those royalties currently in effect) or of price controls in a material amount by any government or taxing authority upon a party hereto with respect to delivery of, or acceptance of delivery of, Natural Gas under this Agreement or with respect to any cash payment made pursuant to Section 2.06 which in any case would materially and adversely affect the net cost to Seller or Purchaser of performing its obligations hereunder; or (b) the enactment, promulgation, execution or ratification of, or any change in or amendment to, any regulation or law (or the application or interpretation of any regulation or law, as determined by a court or regulatory authority of competent jurisdiction or as determined by the opinion of independent counsel mutually acceptable to Seller and Purchaser) that occurs after the date hereof which would result in the performance of any obligation of Seller to deliver Natural Gas or Purchaser to accept delivery of Natural Gas under this Agreement being unlawful; or (c) any one or more events of Force Majeure that occur and continue for a consecutive period of longer than ninety (90) days. 12 14 Section 6.02 Accelerated Termination. (a) During the continuation of an Event of Change contemplated by Section 6.01(a), both parties shall make reasonable efforts to make arrangements to avoid the imposition of any Tax contemplated by Section 6.01(a); provided that this Section 6.02 shall not impose on either party any obligation other than to negotiate in good faith to make such arrangements as will not adversely affect the parties. (b) During the continuation of any Event of Change, and if any arrangement is not, or is not capable of being, made pursuant to Section 6.02(a), then either party may designate an accelerated termination date ("Accelerated Termination Date") upon not less than two (2) and not more than ten (10) Business Days' notice to the other party. Upon the Accelerated Termination Date, the parties' obligations hereunder shall terminate, except for the obligations contained in Section 6.03 and Section 7.02. Section 6.03 Payments on Accelerated Termination. Upon the designation of an Accelerated Termination Date, Seller, at the option of Purchaser, shall either (i) deliver any Natural Gas otherwise deliverable hereunder to Purchaser, provided that such delivery of Natural Gas by Seller would not then be unlawful and Seller has the ability to make such delivery or (ii) Seller shall pay to Purchaser an amount equal to the Termination Payment plus any Unpaid Amounts. All amounts payable under this Section 6.03 shall become due on the Accelerated Termination Date and shall be payable on the fifth (5th) Business Day following delivery by Purchaser of the certificate of calculation of the Termination Payment contemplated by Section 5.03. Upon the occurrence of an Accelerated Termination Date, Purchaser may, in its sole discretion, elect either remedy set forth in this Section 6.03. Such remedies shall be Purchaser's sole remedy; provided that nothing herein shall affect a party's obligation to make payments of amounts which were due and owing (whether or not payable) on or prior to the occurrence of such Accelerated Termination Date. ARTICLE VII - MISCELLANEOUS Section 7.01 Notice. Any demand, notice or communication to be made or given hereunder shall be in writing and may be made or given by personal delivery or by transmittal by telecopy, rapifax or other electronic means of communication addressed to the respective party as follows: To Seller: Crystal Gas L.L.C. c/o Crystal Oil Company 229 Milam Shreveport, Louisiana 71101 Attention: Chief Financial Officer Telecopier No.: (318) 677-5515 Telephone No.: (318) 677-5512 with copy to: Fulbright & Jaworski, L.L.P. 1301 McKinney Street Suite 5100 Houston, Texas 77002 13 15 Attention: Curtis W. Huff Telcopier No.: (713) 651-5246 Telephone No.: (713) 651-5657 To Purchaser: The Chase Manhattan Bank One Chase Manhattan Plaza New York, New York 10081 Attention: Alex Mintcheff Telecopier No.: (212) 552-2259 Telephone No.: (212) 552-1255 with copy to: Chase Securities Inc. 700 Travis -5 TCBN Houston, Texas 77002 Telecopier No.: (713) 216-4117 Telephone No.: (713) 216-4110 Attention: Paul Nidoh or to such other address or telecopy number or rapifax number as any party may from time to time notify the others in accordance with this Section 7.01. Any demand, notice or certification made or given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof, or, if made or given by electronic means of communication, on the date of such transmittal or if such date is not a Business Day, on the first Business Day following the transmittal thereof. Section 7.02 Interest on Overdue Amounts. If any monetary amounts payable under this Agreement are not paid when due, then such overdue amount shall bear interest for each day until paid in full, payable on demand, both before and after default, judgment, the Early Termination Date and the Accelerated Termination Date, at the U.S. Base Rate plus one and one-half percent per annum on the basis of the actual number of days elapsed and on the basis of a year of 360 days, as the case may be. Such interest shall be determined daily and compounded monthly in arrears on the last day of each calendar month. Section 7.03 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws that would result in the application of the laws of a another jurisdiction. Section 7.04 Severability. In the event that one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law the validity, legality or enforceability of the remaining provisions hereof shall not be affected or impaired thereby. Each of the Sections of this Agreement is hereby declared to be separate and distinct. Section 7.05 Currency. All amounts expressed herein or therein in terms of money refer to the United States Dollar and all payments to be made hereunder shall be made in such currency. 14 16 Section 7.06 Purchaser Not an Agent. Purchaser acknowledges and confirms that all purchases of Natural Gas hereunder are being made by it as a principal and that it is not acting as agent for any other Person in connection with purchases of Natural Gas hereunder. Section 7.07 Benefit of the Agreement. This Agreement shall inure to the benefit of and be binding upon Seller, Purchaser and their respective successors and assigns. Section 7.08 Assignment and Transfer. Except as expressly provided in this Section 7.08, neither party may assign any rights or delegate any obligations hereunder without the prior written consent of the other party. Without the consent of Seller, Purchaser may assign this Agreement to any of its direct or indirect wholly owned subsidiaries, whether now existing or hereafter created. Upon notice to Seller of any such assignment, Seller agrees to substitute such assignee or successor corporation for Purchaser hereunder. Without the consent of Purchaser, Seller may (i) assign this Agreement to any direct or indirect wholly owned subsidiary of Guarantor or (ii) merge with any direct or indirect wholly owned subsidiary of Guarantor; provided, however, that (A) such subsidiary agrees to assume all obligations under this Agreement and the Margin Agreement, (B) such subsidiary is a corporation, limited liability company or limited partnership incorporated under the laws of a state in the United States, (C) no Event of Default would occur as the result thereof, and (D) the Guaranty Agreement remains in effect. Upon notice to Purchaser of any such assignment or merger, Purchaser agrees to substitute such assignee or successor for Seller hereunder. Section 7.09 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement, undertaking, declarations, commitments or representations, written or oral, in respect thereof. There are no unwritten oral agreements among the parties. Section 7.10 Amendments. This Agreement may not be modified or amended except by an instrument in writing signed by Purchaser and Seller or by their respective successors or permitted assigns. Section 7.11 No Waivers, Remedies. No failure to exercise and no delay in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law except as otherwise expressly provided herein. Section 7.12 Time of the Essence. Time shall be of the essence of this Agreement. Section 7.13 Counterparts. This Agreement may be executed in counterparts, each of which so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument. Section 7.14 Margin Agreement. Seller's payment obligations under this Agreement are secured by the Margin Agreement, which Margin Agreement is hereby incorporated herein for all purposes. Section 7.15 Intent. The parties intend that this Agreement shall constitute a purchase and sale of inventoriable goods and a forward contract within the meaning of Section 556 of the United States Bankruptcy Code of 1978, as amended from time to time. Section 7.16 Disclosure of Information. In the event that Seller provides to Purchaser written confidential information belonging to Seller or its affiliates which has been denominated in writing as "confidential", Purchaser agrees to thereafter maintain such information in confidence in accordance with 15 17 the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without Purchaser breaching its obligation of confidence to Seller, (iii) are previously known by Purchaser from some source other than Seller, (iv) are hereafter developed by Purchaser without using Seller's information, (v) are hereafter obtained by or available to Purchaser from a third party who owes no obligation of confidence to Seller with respect to such information or through any other means other than through disclosure by Seller, (vi) are disclosed with Seller's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of Purchaser, or (viii) as may be required by law or regulation or order of any governmental authority in any judicial, arbitration or governmental proceeding. Further, Purchaser may disclose any such information to any independent petroleum engineers or consultants, any independent certified public accountants, any legal counsel employed by it in connection with this Agreement, including without limitation, the enforcement or exercise of all rights and remedies thereunder; provided, however, that it imposes on such Person to whom such information is disclosed the same obligation to maintain the confidentiality of such information as is imposed upon it hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless Seller requests in writing at least 30 days prior to the expiration of such three year period, that Purchaser maintain the confidentiality of such information for an additional three year period. Seller waives any and all other rights it may have to confidentiality as against Purchaser arising by contract, agreement, statute or law except as expressly stated in this Section. 16 18 IN WITNESS WHEREOF the Parties hereto have executed this Agreement as of the date first written above. CRYSTAL GAS L.L.C. By: CRYSTAL OIL COMPANY, member By:______________________________ J.A. Ballew Senior Vice President By: CRYSTAL PROGRAM LIMITED, INC., member By:______________________________ J.A. Ballew Vice President THE CHASE MANHATTAN BANK By:____________________________________ Name: Title: 17 19 TABLE OF CONTENTS ARTICLE I - INTERPRETATION Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.03 Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.04 Non-Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE II - SALE AND PURCHASE OF NATURAL GAS Section 2.01 Sale and Purchase of Natural Gas . . . . . . . . . . . . . . . . . . . 4 Section 2.02 Measurement and Quality . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.03 Delivery and Receipt of Natural Gas. . . . . . . . . . . . . . . . . 5 Section 2.04 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.05 Delivery Points upon Force Majeure; Alternate Delivery Points . . . . . 5 Section 2.06 Failure of Delivery or Receipt; Transportation and Balancing . . . . . 6 Section 2.07 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.08 Possession, Title and Risk . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.09 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.11 No Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III - REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of Seller . . . . . . . . . . . . . . . 8 Section 3.02 Representations and Warranties of Purchaser . . . . . . . . . . . . . . 10 ARTICLE IV - COVENANTS Section 4.01 Affirmative Covenants of Seller . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V - EVENTS OF DEFAULT AND EARLY TERMINATION Section 5.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.02 Early Termination by Purchaser . . . . . . . . . . . . . . . . . . . . 11 Section 5.03 Calculation of Termination Payment . . . . . . . . . . . . . . . . . . 12 ARTICLE VI - EVENTS OF CHANGE AND ACCELERATED TERMINATION Section 6.01 Events of Change . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.02 Accelerated Termination . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.03 Payments on Accelerated Termination . . . . . . . . . . . . . . . . . . 13 ARTICLE VII - MISCELLANEOUS Section 7.01 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7.02 Interest on Overdue Amounts . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.03 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i 20 Section 7.04 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.05 Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.06 Purchaser Not an Agent . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.07 Benefit of the Agreement . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.08 Assignment and Transfer . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.09 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7.10 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.11 No Waivers, Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.12 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.14 Margin Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.15 Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.16 Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . 16
Annex 1 Seller's Conditions Precedent Exhibit A - Form of Opinion of Counsel of Guarantor ii 21 ANNEX 1 TO NATURAL GAS INVENTORY FORWARD SALE CONTRACT CONDITIONS PRECEDENT 1. The executed Margin Agreement. 2. The executed Guaranty Agreement. 3. An opinion of Fulbright and Jaworski, L.L.P., special counsel to Seller and Guarantor, in substantially the form set out in Exhibit A. 4. A certificate of the Secretary or an Assistant Secretary of Seller setting forth (i) resolutions of its members with respect to the authorization of Seller to execute and deliver the Agreement and the Margin Agreement and to enter into the transactions contemplated in those documents, (ii) the managing member or officers of such Person (y) who are authorized to sign such agreements and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with such agreements and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the organization documents of Seller, certified as being true and complete. Purchaser may conclusively rely on such certificate until it receives notice in writing from Seller to the contrary. 5. A certificate of the Secretary or an Assistant Secretary of Guarantor setting forth (i) resolutions of its board of directors with respect to the authorization of Guarantor to execute and deliver the Guaranty Agreement and to enter into the transactions contemplated in those documents, (ii) the officers of the Guarantor (y) who are authorized to sign such agreement and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with such agreement and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of Guarantor, certified as being true and complete. Purchaser may conclusively rely on such certificate until it receives notice in writing from Seller to the contrary. 6. An executed security agreement and financing statement granting to the Purchaser a lien on the agreements evidencing the Hedged Volumes (as defined in the Margin Agreement). 7. Copy of the agreements evidencing the Hedged Volumes. Annex 1-i EX-11 3 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 CRYSTAL OIL COMPANY COMPUTATION OF INCOME PER COMMON SHARE (In Thousands Except Share and Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------------- -------------------------- 1997 1996 1997 1996 ----------- ------------ ----------- ----------- Earnings per common share: Income from operations $ 495 $ 539 $ 1,309 $ 1,282 =========== ============ =========== =========== Weighted average of common shares outstanding 2,665,622 2,662,082 2,665,622 2,658,229 =========== ============ =========== =========== Earnings per common share $ .19 $ .20 $ .49 $ .48 =========== ============ =========== =========== Primary: (Including dilutive Common Stock equivalents) Income from operations $ 495 $ 539 $ 1,309 $ 1,282 Adjustments to income (net of income tax): - - - - ----------- ------------ ----------- ----------- Adjusted net income $ 495 $ 539 $ 1,309 $ 1,282 =========== ============ =========== =========== Weighted average of common and common equivalent shares: Outstanding 2,665,622 2,662,082 2,665,622 2,658,229 Assuming conversion or exercise of: Stock options, net of treasury shares 27,954 26,974 27,823 30,666 Remaining senior preferred stock 33,274 33,274 33,274 33,274 ----------- ------------ ----------- ----------- 2,726,850 2,722,330 2,726,719 2,722,169 =========== ============ =========== =========== Per share amount: Net income $ .18 $ .20 $ .48 $ .47 =========== ============ =========== ===========
2 EXHIBIT 11 (continued) CRYSTAL OIL COMPANY COMPUTATION OF INCOME PER COMMON SHARE (In Thousands Except Share and Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------------ -------------------------- 1997 1996 1997 1996 ---------- ----------- ----------- ------------ Fully-diluted: Income from operations $ 495 $ 539 $ 1,309 $ 1,282 Adjustments to income (net of income tax): - - - - ---------- ----------- ----------- ------------ Adjusted net income $ 495 $ 539 $ 1,309 $ 1,282 ========== =========== =========== ============ Weighted average of common shares: Outstanding 2,665,622 2,662,082 2,665,622 2,658,229 Assuming conversion or exercise of: Stock options, net of treasury shares 29,417 26,974 29,079 30,666 Remaining senior preferred stock 33,274 33,274 33,274 33,274 ---------- ----------- ----------- ------------ 2,728,313 2,722,330 2,727,975 2,722,169 ========== =========== =========== ============ Per share amount: Net income $ .18 $ .20 $ .48 $ .47 ========== =========== =========== ============
NOTE: See Note 3 of Notes to Consolidated Condensed Financial Statements. EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet at June 30, 1997 and the consolidated statement of income for the six months ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,302 49,120 13,969 62 0 70,637 110,600 7,315 202,229 1,799 79,705 0 148 27 120,550 202,229 6,854 3,657 0 2,783 0 18 1,610 2,150 841 1,309 0 0 0 1,309 .49 .49
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