-----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, RIGfWTro7bVSJHtHkmzglLp2evTkMCv8LfcJFiY9OY8C8muc9b3oETPGRFujeA89 i4ANrYT6Fxchxqsi99CXbg== 0000950116-98-001091.txt : 19980514 0000950116-98-001091.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950116-98-001091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE ENERGY CORP CENTRAL INDEX KEY: 0000709355 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 760035225 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10990 FILM NUMBER: 98618939 BUSINESS ADDRESS: STREET 1: ONE RADNOR CORPORATE CTR STE 250 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6109959400 MAIL ADDRESS: STREET 1: ONE RADNOR CORPORATE CENTER SUITE 250 STREET 2: 100 MATSONFORD CITY: RADNOR STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN OIL & GAS INC/NEW DATE OF NAME CHANGE: 19861117 FORMER COMPANY: FORMER CONFORMED NAME: MINDEN HOLDING CO DATE OF NAME CHANGE: 19830310 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 ------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ended ---------------------- Commission file number: 0-10990 ------- CASTLE ENERGY CORPORATION ----------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 76-0035225 - --------------------------------- ------------------------------------ (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) One Radnor Corporate Center, Suite 250, 100 Matsonford Road, ------------------------------------------------------------- (Address of Principal Executive Offices) Radnor, Pennsylvania 19087 --------------------------------- (Zip Code) Registrant's Telephone Number, Including Area Code (610) 995-9400 -------------- - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 3,544,029 shares of Common Stock, $.50 par value outstanding as of April 30, 1998. CASTLE ENERGY CORPORATION INDEX
Page # ------ Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 1998 (Unaudited) and September 30, 1997....................................................... 1 Consolidated Statements of Operations - Three Months Ended March 31, 1998 and 1997 (Unaudited).................................... 2 Consolidated Statements of Operations - Six Months Ended March 31, 1998 and 1997 (Unaudited).......................................... 3 Consolidated Statements of Cash Flows - Six Months Ended March 31, 1998 and 1997 (Unaudited).......................................... 4 Consolidated Statements of Stockholders' Equity - Year Ended September 30, 1997 and Six Months Ended March 31, 1998 (Unaudited)......................................................... 5 Notes to the Consolidated Financial Statements (Unaudited)................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................10 Part II. Other Information Item 1. Legal Proceedings............................................................19 Item 6. Exhibits and Reports on Form 8-K.............................................19 Signature ..........................................................................................20
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CASTLE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ("000's" Omitted Except Share Amounts)
March 31, September 30, 1998 1997 ------------ ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents................................................. $37,090 $36,338 Restricted cash........................................................... 600 497 Accounts receivable....................................................... 7,764 5,868 Prepaid transportation, net............................................... 1,500 1,500 Prepaid expenses and other current assets................................. 400 452 Deferred income taxes..................................................... 883 2,239 Note receivable - Penn Octane Corporation................................. 1,000 Note receivable - MG...................................................... 10,000 Estimated realizable value of discontinued net refining assets............. 4,422 4,422 ------- -------- Total current assets.................................................... 53,659 61,316 Property, plant and equipment, net: Furniture, fixtures and equipment......................................... 152 180 Oil and gas properties, net (full cost method)................................ 3,700 2,818 Gas contracts, net............................................................ 11,015 15,747 Prepaid transportation, net................................................... 302 1,162 Deferred income taxes......................................................... 1,494 Other......................................................................... 75 ------- ------- Total assets............................................................ $68,903 $82,717 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Dividend payable.......................................................... $ 528 $ 707 Accounts payable.......................................................... 7,134 5,615 Accrued expenses.......................................................... 1,153 1,257 Net refining liabilities retained.......................................... 5,927 7,353 ------- ------- Total current liabilities............................................... 14,742 14,932 Long-term liabilities......................................................... 20 ------- ------- Total liabilities....................................................... 14,742 14,952 ------- ------- Commitments and contingencies Stockholders' equity: Series B participating preferred stock; par value - $1.00; 10,000,000 shares authorized; no shares issued Common stock; par value - $0.50; 25,000,000 shares authorized; 6,800,646 shares issued at March 31, 1998 and 6,798,646 shares issued at September 30, 1997............................................ 3,400 3,399 Additional paid-in capital................................................ 67,080 67,061 Retained earnings......................................................... 26,599 22,468 ------- ------- 97,079 92,928 Treasury stock at cost - 3,254,617 shares at March 31, 1998 and 2,085,100 shares at September 30, 1997 (42,918) (25,163) ------- ------- Total stockholders' equity .......................................... 54,161 67,765 ------- ------- Total liabilities and stockholders' equity........................... $68,903 $82,717 ======= =======
The accompanying notes are an integral part of these financial statements. -1- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("000's" Omitted Except Share Amounts) (Unaudited)
Three Months Ended March 31, --------------------------------- 1998 1997 ---- ---- Revenues: Natural gas marketing and transmission: Gas sales.......................................................... $ 17,885 $ 20,367 --------- --------- 17,885 20,367 --------- --------- Exploration and production: Oil and gas sales.................................................. 562 2,682 Well operations.................................................... 57 129 --------- --------- 619 2,811 --------- --------- 18,504 23,178 --------- --------- Expenses: Natural gas marketing and transmission: Gas purchases...................................................... 11,113 12,832 Transportation..................................................... 400 Operating costs (recovery)......................................... (16) 129 General and administrative......................................... 12 373 Depreciation and amortization...................................... 2,366 2,779 --------- --------- 13,875 16,113 --------- --------- Exploration and production: Oil and gas production............................................. 183 717 General and administrative......................................... 85 403 Depreciation, depletion and amortization........................... 164 405 --------- --------- 432 1,525 --------- --------- Corporate general and administrative expenses........................ 828 639 --------- --------- 15,135 18,277 --------- --------- Operating income......................................................... 3,369 4,901 --------- --------- Other income (expense): Interest income...................................................... 594 210 Other income (expense)............................................... 8 (11) Interest expense..................................................... (554) --------- --------- 602 (355) --------- --------- Net income before provision for income taxes............................. 3,971 4,546 --------- --------- Provision for income taxes: State................................................................ 40 45 Federal.............................................................. 1,389 1,591 --------- --------- 1,429 1,636 --------- --------- Net income............................................................... $ 2,542 $ 2,910 ========= ========= Net income per share: Basic................................................................ $ .61 $ .50 ========= ========= Diluted.............................................................. $ .61 $ .50 ========= ========== Weighted average number of common and potential dilutive common shares outstanding: Basic............................................................. 4,144,129 5,778,228 ========== ========= Diluted........................................................... 4,181,244 5,820,232 ========== =========
The accompanying notes are an integral part of these financial statements. -2- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("000's" Omitted Except Share Amounts) (Unaudited)
Six Months Ended March 31, ------------------------------ 1998 1997 ---- ---- Revenues: Natural gas marketing and transmission: Gas sales.......................................................... $ 38,148 $ 38,792 ----------- ------------ 38,148 38,792 ----------- ------------ Exploration and production: Oil and gas sales.................................................. 1,220 4,776 Well operations.................................................... 115 235 ----------- ------------ 1,335 5,011 ----------- ------------ 39,483 43,803 ----------- ------------ Expenses: Natural gas marketing and transmission: Gas purchases...................................................... 24,199 24,075 Transportation..................................................... 860 Operating costs.................................................... (16) 368 General and administrative......................................... 38 677 Depreciation and amortization...................................... 4,731 5,684 ----------- ------------ 29,812 30,804 ----------- ------------ Exploration and production: Oil and gas production............................................. 348 1,294 General and administrative......................................... 307 615 Depreciation, depletion and amortization........................... 327 899 ----------- ------------ 982 2,808 ----------- ------------ Corporate general and administrative expenses........................ 1,568 1,782 ----------- ------------ 32,362 35,394 ----------- ------------ Operating income......................................................... 7,121 8,409 ----------- ------------ Other income (expense): Interest income...................................................... 1,231 435 Other income (expense)............................................... 29 (51) Interest expense..................................................... (753) ----------- ------------ 1,260 (369) ----------- ------------ Net income before provision for income taxes............................. 8,381 8,040 ----------- ------------ Provision for income taxes: State................................................................ 84 80 Federal.............................................................. 2,933 2,814 ----------- ------------ 3,017 2,894 ----------- ------------ Net income............................................................... $ 5,364 $ 5,146 =========== ============ Net income per share: Basic................................................................ $ 1.21 $ .80 =========== ============ Diluted.............................................................. $ 1.20 $ .80 =========== ============ Weighted average number of common and potential dilutive common shares outstanding: Basic............................................................ 4,434,363 6,397,746 =========== =========== Diluted.......................................................... 4,465,767 6,429,848 =========== ===========
The accompanying notes are an integral part of these financial statements. -3- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ("000's" Omitted) (Unaudited)
Six Months Ended March 31, ------------------------------- 1998 1997 ---- ---- Net cash flow provided by operating activities.......................... $22,110 $13,900 ------- ------- Cash flows from investing activities: Investment in pipelines.............................................. (9) Investment in oil and gas properties................................. (1,209) (225) Investment in note receivable - Penn Octane Corporation.............. (1,000) ------- ------- Net cash used in investing activities........................... (2,209) (234) ------- ------- Cash flows from financing activities: Proceeds of long-term debt............................................ 13,986 Repayment of long-term debt........................................... (11,835) Dividends paid to stockholders........................................ (1,414) Acquisition of treasury stock......................................... (17,755) (14,063) Proceeds from exercise of stock options............................... 20 87 ------- ------- Net cash provided by (used in) financing activities............. (19,149) (11,825) ------- ------- Net increase (decrease) in cash and cash equivalents..................... 752 1,841 Cash and cash equivalents - beginning of period.......................... 36,338 3,457 ------- ------- Cash and cash equivalents - end of period................................ $37,090 $ 5,298 ======= =======
The accompanying notes are an integral part of these financial statements. -4- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ("000's" Omitted Except Share Amounts)
Common Stock Additional Retained Treasury Stock --------------------- Paid-In Earnings --------------------- Shares Amount Capital (Deficit) Shares Amount Total ------ ------ ---------- ----------- ------ ------ --------- Balance - October 1, 1996......... 6,693,646 $3,347 $66,316 ($2,952) $66,711 Stock acquired.................... 2,085,100 ($25,163) (25,163) Options exercised................. 105,000 52 745 797 Dividends......................... (1,446) (1,446) Net income........................ 26,866 26,866 --------- ------ ------- ------- --------- -------- ------- Balance - September 30, 1997...... 6,798,646 3,399 67,061 22,468 2,085,100 (25,163) 67,765 Stock acquired.................... 1,169,517 (17,755) (17,755) Options exercised................. 2,000 1 19 20 Dividends declared................ (1,233) (1,233) Net income........................ 5,364 5,364 --------- ------ ------- ------- --------- -------- ------- Balance - March 31, 1998 6,800,646 $3,400 $67,080 $26,599 3,254,617 $(42,918) $54,161 ========= ====== ======= ======= ========= ========= =======
The accompanying notes are an integral part of these financial statements. -5- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts) (Unaudited) Note 1 - Basis of Preparation The unaudited consolidated financial statements of Castle Energy Corporation (the "Company") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain reclassifications have been made to make the periods presented comparable. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the Company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the three month and the six month periods ended March 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1998 or for subsequent periods. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. In the opinion of the Company, the unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the three and six month periods ended March 31, 1998 and 1997 and for a fair statement of financial position at March 31, 1998 and 1997. Note 2 - September 30, 1997 Balance Sheet The amounts presented in the balance sheet as of September 30, 1997 were derived from the Company's audited consolidated financial statements which were included in its Annual Report on Form 10-K for the fiscal year ended September 30, 1997. Note 3 - Discontinued Operations From August 1989 to September 30, 1995, several of the Company's subsidiaries conducted refining operations. By December 12, 1995, the Company's refining subsidiaries had sold all of their refining assets. In addition, Powerine Oil Company ("Powerine"), one of the Company's refining subsidiaries, merged into a subsidiary of the purchaser and is no longer a subsidiary of the Company. The Company's other refining subsidiaries own no refining assets and are in the process of liquidation. As a result, the Company has accounted for its refining operations as discontinued operations. Note 4 - Contingencies/Litigation Powerine Arbitration In October 1997, the Company recovered $8,700 from the Powerine Arbitration. The Company believes it is entitled to an additional $2,142 plus interest and its special legal counsel presented arguments to the arbitrator to recover this amount. On January 27, 1998, the arbitrator ruled against -6- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts) (Unaudited) the Company. The Company is currently pursuing other alternatives to recover the $2,142. Reference should be made to the Company's Form 10-Q for the quarter ended December 31, 1997 and to Item 3 of the Company's Annual Report on Form 10-K for the year ended September 30, 1997. SWAP Agreement - MGNG In January 1998, IRLP filed suit against MG Natural Gas, Inc. ("MGNG"), a subsidiary of Metallgesellschaft Corp. ("MG"), to collect $703 plus interest. In February 1998, MGNG contended that the $703 was never owed to IRLP and that it had liquidated the subsidiary owing the $703. Management and general counsel believe that MGNG's counterclaims are not supported by the facts and do not affect the merits of IRLP's claims, which IRLP intends to pursue vigorously. Reference should be made to the Company's Form 10-Q for the quarter ended December 31, 1997 and to Item 3 of the Company's Annual Report on Form 10-K for the year ended September 30, 1997. Larry Long Litigation There have been no significant developments since September 30, 1997. Reference should be made to Form 10-Q for the quarter ended December 31, 1997 and to the Company's Annual Report on Form 10-K for the year ended September 30, 1997. MGNG Litigation On May 4, 1998, a subsidiary of the Company filed a lawsuit against MGNG and MG Gathering Company, another subsidiary of MG, in the district court of Harris County, Texas. The Castle subsidiary seeks to recover gas measurement and transportation expenses charged by the defendants in breach of a certain gas purchase contract. Improper charges total approximately $750,000 before factoring in interest. This litigation is in a very preliminary stage: Defendants have not answered and discovery has not commenced. Powerine Class Action Lawsuit In July 1996, Powerine was served with a suit concerning operations of the Powerine Refinery in the Superior Court of the State of California in Los Angeles, California. The suit claims the Powerine Refinery is a public nuisance, that it has released excessive toxic and noxious emissions and caused physical and emotional distress and property damage to residents living nearby. The Company was also named as a defendant in the suit. In March 1997, the Company was served with the lawsuit. In April 1997, the Company filed a motion to quash the plaintiffs' summons based upon the lack of jurisdiction. On May 2, 1997, the court granted the Company's motion. As a result, the Company is no longer a defendant in the Powerine Class Action Lawsuit. -7- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts) (Unaudited) Note 5 - GAMXX Agreement On February 27, 1998, the Company entered into an agreement with Alexander Allen, Inc. ("AA") concerning amounts owed to the Company by AA and its subsidiary, GAMXX Energy, Inc. ("GAMXX"). The Company had made loans to GAMXX through 1991 in the aggregate amount of approximately $8,000. When GAMXX was unable to obtain financing, the Company recorded a one hundred percent loss provision on its loans to GAMXX while still retaining its lender's liens against GAMXX. Pursuant to the terms of the GAMXX Agreement, the Company is to receive $1,000 cash in settlement for its loans when GAMXX closes on its financing. GAMXX expects such closing not later than May 31, 1998. The Company has carried its loan to GAMXX at zero the last six years. The Company will record the $1,000 proceeds as "other income" if and when it collects such amount. There can be no assurance that GAMXX will close on its financing. Note 6 - Accounting Pronouncements In February 1997, FASB issued SFAS No. 128, "Earnings Per Share," ("FAS No.128") which establishes standards for computing and presenting earnings per share ("EPS") for entities with publicly held common stock. SFAS No. 128 simplifies the standards for computing EPS previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS, and requires dual presentations of basic and diluted EPS on the face of the income statement. SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and early adoption is not permitted. The Company adopted FAS 128 effective October 1, 1997. Earnings per share for the three and six month periods ended March 31, 1998 have been stated in accordance with FAS No. 128 and earnings per share for the three and six month periods ended March 31, 1997 have been restated in accordance with FAS No. 128. Note 7 - Derivative Financial Instruments The Company utilizes derivative financial instruments to reduce its exposure to changes in the market price of natural gas. Commodity derivatives utilized as hedges of natural gas are futures contracts. Natural gas basis swaps are sometimes used to hedge the basis differential between the derivative financial instrument index price and the natural gas field price. In order to qualify as a hedge, price movements in the underlying commodity derivative must be highly correlated with the hedged commodity. -8- Castle Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts) (Unaudited) Gains and losses on futures contracts that qualify as a hedge of firmly committed or anticipated purchases and sales of natural gas are deferred on the balance sheet and credited or debited to cost of gas purchased and recognized in operations when the related hedged transaction occurs. Gains or losses on derivative financial instruments that do not qualify as a hedge are recognized in income currently. There were no such deferred gains or losses at March 31, 1998 or September 30, 1997. As a result of hedging transactions, the cost of gas purchased increased $340 for the six months ended March 31, 1998 and decreased $485 for the six months ended March 31, 1997 Note 8 - Subsequent Events Subsequent to March 31, 1998, the Company repurchased 5,000 shares of its outstanding common stock. The purchase price was $80 ($16.00 per share). Subsequent to March 31, 1998, an option holder exercised options to purchase 3,000 shares of the Company's common stock. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS As noted previously, the Company had discontinued its refining operations by September 30, 1995. As a result, management's discussion and analysis focus primarily on the Company's continuing operations -- natural gas marketing and exploration and production. All references herein to dollars are in thousands. In May 1997, the Company sold approximately 84% of its proved oil and gas reserves and its Texas pipeline to Union Pacific Resources Company ("UPRC") and one of its subsidiaries. As a result, the operations related to the assets sold impacted operations for all of the three and six month periods ended March 31, 1997 but did not impact operations for the three month and six month periods ended March 31, 1998. The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and has included a discussion of risk factors related to Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussion and analysis below include forward-looking data that are based upon management's estimates, assumptions and projections. Important factors such as the risk factors listed below and other factors could cause results to differ materially from those expected by management. NATURAL GAS MARKETING As noted above, the Company sold its Texas oil and gas properties and pipeline to UPRC in May of 1997 while retaining its gas marketing operations which consist primarily of a long-term gas sales contract ("Lone Star Gas Contract") with Lone Star Gas Company ("Lone Star"). The sale had the following effects on the Company's natural gas marketing operations: a. The Company now has to purchase gas for the Lone Star Contract that previously was produced from the Company's Texas oil and gas properties. As a result, the Company became subject to price risk on such future gas purchases whereas previously the Company was subject to reserve production risk - the possibility that the volumes of gas produced were more or less than those expected. Previously, the Company's marketing subsidiary purchased a portion of the gas required for the Lone Star Contract from one of the Company's exploration and production subsidiaries. The resultant intercompany sales were eliminated in consolidation. Since the sale to UPRC, the Company's gas marketing subsidiary has purchased all gas required for the Lone Star Contract from unrelated parties. b. Having sold its Texas pipeline, the Company now requires outside transportation to transport its gas to Lone Star. A subsidiary of UPRC, the purchaser of the Company's Texas pipeline, agreed to transport all of the remaining Lone Star gas as part of the related purchase and sale agreement. The Company has recorded the value of such prepaid transportation at $3,000, its estimated fair market value, and is amortizing the prepayment over the term of the Lone Star Contract based upon deliveries made. Previously, the Company incurred operating expenses to operate the pipeline and recorded pipeline depreciation. -10- Gross Margin A comparison of the gross margins earned by the Company's natural gas marketing segment is as follows:
Lone Star MGNG Intercompany Contract Contract Eliminations Consolidated -------- -------- ------------ ------------ Six Months Ended March 31, 1998: > Gas Sales $35,690 $2,458 $38,148 Gas purchases (20,886) (3,313) (24,199) ------- ------- ------- Gross margin $14,804 $ (855) $13,949 ======= ======= ======= Six Months Ended March 31, 1997: Gas Sales $39,241 $2,445 ($2,894) $38,792 Gas purchases (24,065) (2,904) 2,894 (24,075) ------- ------ ------ ------- Gross margin $15,176 ($ 459) $14,717 ======= ====== ====== =======
Natural gas sales under the Lone Star Contract decreased $3,551 or 9.0% from the first six months of fiscal 1997 to the first six months of fiscal 1998. Under the Lone Star Contract the price received for gas is fixed through May 31, 1999. The variance in gas sales, therefore, is almost entirely attributable to the volumes of gas delivered. Although the volumes delivered to Lone Star annually are essentially fixed (the Lone Star Contract has a take-or-pay provision), the Lone Star Contract year is from February 1 to January 31 whereas the Company's fiscal year is from October 1 to September 30. Furthermore, although the volumes to be taken by Lone Star in a given contract year are fixed, there is no provision requiring fixed monthly or daily volumes and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such variances have been significant. As a result, Lone Star deliveries, although fixed for a contract year, may be skewed and not proportional for the Company's fiscal periods. For the first six months of fiscal 1998 deliveries and sales to Lone Star exceeded by approximately 6.5% those which would have resulted if daily deliveries had been fixed and equal. Since annual deliveries and sales have historically approximated the annual volumes Lone Star is required to take under the Lone Star Contract, it is expected that deliveries and sales for the remainder of fiscal 1998 will average less than those which would have resulted if daily deliveries were fixed and equal. Gas purchases for the Lone Star Contract decreased $3,179 or 13.2% from the first six months of fiscal 1997 to the first six months of fiscal 1998. For the six months ended March 31, 1997 gas purchases comprised 61.3% of gas sales versus 58.5% of gas sales for the six months ended March 31, 1998. From 1997 to 1998 the gross margin decreased $372 or 2.5%. During the same periods the gross margin percentage ((gas sales - gas purchases) as a percentage of gas sales) increased 2.8% from 38.7% for the six months ended March 31, 1997 to 41.5% for the six months ended March 31, 1998. The decrease in gas purchases as a percentage of gas sales and related increase in the gross margin percentage resulted primarily from a non-recurring favorable adjustment of gas purchase costs ($517), the replacement of high price contracts expiring in April 1997 with market price contracts and from lower market prices in fiscal 1998. The Company acquires approximately 90% of the -11- gas required for the Lone Star Contract pursuant to a fixed price gas sales contract with MGNG ("MG Contract"). As a result the changes in the periods being compared relate to factors affecting the 10% of gas supplies that the Company must acquire on the open market at market prices. Most of this 10% requirement remains unhedged. Therefore, the Company is subject to gas price risk with respect thereto. MGNG Contract One of the Company's natural gas marketing subsidiaries is a party to the MG Contract. Pursuant to the terms of the contract, the subsidiary is required to sell to MGNG 7,356 MMBtu's (British thermal units) of natural gas at a fixed price ratably over the period from June 1, 1996 to May 31, 1999. The fixed price for the gas sold to MGNG is significantly less than the fixed price of gas sold to Lone Star. For the six months ended March 31, 1998, the Company realized a negative gross margin of $855 versus a negative gross margin of $459 for the six months ending March 31, 1997. The negative margins resulted because the spot (market) prices paid by the Company for gas, net of hedging effects where applicable, exceeded the fixed price received by the Company from MGNG under the contract. The higher negative gross margins for the six months ended March 31, 1998 resulted because the spot prices paid by the Company, net of hedging effects, were greater in fiscal 1998 than in fiscal 1997. The Company has not yet hedged most of the remaining gas supply requirement for this contract. In addition, the Company expects to realize a significant negative gross margin on this contract for the remainder of fiscal 1998 given relatively high gas prices. Future gross margins will, however, depend primarily on future spot (market) prices of gas and the results of the Company's efforts to hedge its remaining gas purchase commitments at favorable prices. Operating Costs Operating costs decreased to a credit of $16 for the six months ended March 31, 1998 from $368 for the six months ended March 31, 1997 because the Texas pipeline was sold to UPRC in May 1997 and the Company no longer incurs operating costs to operate the Texas pipeline. General and Administrative General and administrative costs decreased $639 from $677 for the six months ended March 31, 1997 to $38 for the six months ended March 31, 1998. Most general and administrative costs incurred during the six months ended March 31, 1997 related to the Texas pipeline, which was sold in May 1997. The remaining administrative costs consist primarily of consulting fees for on-going gas marketing operations. Transportation Transportation expense increased $860 from zero for the six months ended March 31, 1997 to $860 for the six months ended March 31, 1998. In 1997, one of the Company's subsidiaries owned and operated the Texas pipeline and all transportation revenues were for intercompany transportation and were accordingly eliminated in consolidation of the Company's financial statements. In 1998, transportation expense consisted entirely of the amortization of a $3,000 prepaid transportation asset. Amortization is based upon and thus proportional to deliveries made to Lone Star. -12- Depreciation and Amortization Depreciation and amortization decreased $953 or 16.8% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The decrease is attributable to the sale of the Texas pipeline to UPRC in May 1997. As a result of the sale, the Company no longer owned and depreciated the Texas pipeline. EXPLORATION AND PRODUCTION As noted above, the Company sold its Texas oil and gas properties to UPRC in May 1997. The reserves sold represented approximately 84% of the Company's proved oil and gas reserves and 60%- 65% of the Company's gas production at the time of sale. Comparison of current oil and gas sales, production costs, general and administrative costs and depletion, depreciation and amortization to those in fiscal 1997 is thus not meaningful. Accordingly, exploration and production operations comparisons and analysis have been limited to those oil and gas properties which were not sold to UPRC. The related operating results for such properties are as follows:
Six Months Ended March 31, -------------------------------- 1998 1997 ---- ---- Revenues: Oil and gas sales........................................... $1,220 $1,728 Well operations............................................. 115 170 ------- ------- 1,335 1,898 ------- ------- Expenses: Oil and gas production...................................... 248 192 General and administrative.................................. 407 461 Depreciation, depletion and amortization.................... 327 429 ------- ------- 982 1,082 ------- ------- Operating income................................................. $ 353 $ 816 ======= =======
Revenues Oil and Gas Sales Oil and gas sales decreased $508 or 29.4% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The decrease is attributable to decreased oil and gas prices and decreased production. Although the Company has participated in drilling approximately twenty-four new wells from July 1997 through March 31, 1998, production from such new drilling activities has only recently begun impacting operations. The Company is currently participating in two drilling programs and expects to participate in at least 11-16 additional, new wells in fiscal 1998. The Company is also reviewing possible investments in other oil and gas drilling programs and oil and gas property acquisitions. As a result, the Company expects that its oil and gas sales will eventually increase given stable or increasing oil and gas sales prices but there can be no assurance that wells expected to be drilled will actually be drilled or that oil and gas sales will increase. -13- Well Operations Revenue from well operations decreased $55 or 32.4% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The decrease is attributable to the Company's resignation as operator on certain Appalachian wells where a non-operator offered to operate the wells at a cost significantly less than that being incurred by the Company in performing such operations. The related well operations revenues were not replaced. Expenses Oil and Gas Production Oil and gas production expenses increased $56 or 29.2% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The increase in oil and gas production expenses results from the general maturing of the Company's oil and gas properties and the tendency for older, depleting properties to carry a higher production expense burden than recently drilled properties. Furthermore, oil and gas production expenses, especially non-capitalized repairs, do not generally occur evenly throughout the year and are best compared on an annual rather than on a quarterly basis. The Company expects that, although oil and gas production expense will increase as a result of its new drilling activities, such expenses will decline when compared to oil and gas sales given the lower production costs typically associated with new production. There can be no assurance, however, that such will be the case. General and Administrative General and administrative costs decreased $54 or 11.7% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The net decrease was attributable to lower insurance costs, tax refunds and vendor settlements in fiscal 1998 for which there was no counterpart in fiscal 1997. This was offset slightly by higher employee costs in fiscal 1998. Depreciation, Depletion and Amortization Depreciation, depletion and amortization decreased $102 or 23.8% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The decrease is attributable to decreased production and to a decrease in the cost per equivalent mcf of proved reserves in the Company's full cost amortization center. The decrease in the cost per equivalent mcf in the Company's full cost amortization center resulted from the sale of 84% of the Company's oil and gas reserves to UPRC in May of 1997. The consequence will be a decrease in future depreciation, depletion and amortization charges per unit to the Company's exploration and production operations. OTHER INCOME (EXPENSE) Interest Income Interest income increased $786 or 183.0% from the first six months of fiscal 1997 to the first six months of fiscal 1998. The increase is primarily attributable to an increase in unrestricted cash. At March 31, 1998, the Company had $37,090 of unrestricted cash versus only $5,298 a year earlier. For the six months ended March 31, 1997, $400 of interest income was attributable to a note receivable from MG related to the Powerine Arbitration and $35 resulted from the investment of excess cash. -14- For the six months ended March 31, 1998 $31 was attributable to interest on the MG note, $44 was attributable to interest on a note from Penn Octane Corporation ("Penn Octane") and the remaining $1,156 was attributable to the investment of excess cash. Interest on the MG note ceased on October 14, 1997. The Penn Octane note, in the principal amount of $1,000, is unsecured, bears interest at 10% and is due the earlier of June 30, 1998 or the closing of any financing by Penn Octane in excess of $5,000. The Company expected Penn Octane to close such a financing in January 1998 but it has not yet been able to do so. Penn Octane has, however, paid interest due on the note when scheduled. The Company will continue to monitor its investment in Penn Octane. Interest Expense Interest expense decreased $753 from $753 for the six month period ended March 31, 1997 to zero for the six months ended March 31, 1998 because the Company repaid all of its long-term debt in May 1997 with a portion of the proceeds from the sale of its Texas oil and gas properties and pipeline to UPRC. TAX PROVISION The tax provision for each of the six month periods ended March 31, 1997 and 1998 essentially represents the amortization of the Company's deferred tax assets at an effective rate of 36% of pre-tax book income. The Company expects to record a similar tax provision for future earnings to the extent of the deferred tax asset of $883 (March 31, 1998). If future events change the Company's estimate concerning the probability of utilizing its tax assets, appropriate adjustments will be made when such a conclusion is reached. Earnings Per Share Since November 1996, the Company has reacquired 3,254,617 shares of its common stock representing approximately 47.8% of shares then outstanding. As a result of these share acquisitions, earnings per share have increased significantly. If no shares had been acquired, earnings per share, assuming no income from the cash used for share acquisitions, would have been as follows: Six Months Ended March 31, ------------------------------ 1998 1997 ---- ---- Basic.......................... $.80 $.77 Diluted........................ $.80 $.76 LIQUIDITY AND CAPITAL RESOURCES All statements other than statements of historical fact contained in this report are forward-looking statements. Forward-looking statements in this report generally are accompanied by words such as "anticipate," "believe," "estimate," or "expect" or similar statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements are disclosed in -15- this report, including without limitation in conjunction with the expected cash receipts and expected cash obligations included below. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph. During the six months ended March 31, 1998, the Company generated $22,110 from operating activities. Of this amount, $8,700 represented the collection of a portion of the MG Note. During the same period the Company invested $1,000 in a note from Penn Octane, $1,209 in oil and gas drilling activities and $17,755 to reacquire shares of its common stock. In addition, it paid $1,414 in stockholder dividends. At March 31, 1998, the Company had $37,090 of unrestricted cash, $38,917 of working capital and no long-term debt. At the present time the probable future cash expenditures of the Company consist of the following: a. Investments in Oil and Gas Properties and Energy Sector - the Company has already entered into a joint venture to drill up to 100 wells in Appalachia over the next three to four years and has undertaken a 10-13 well drilling program on its undrilled Alabama acreage. Ten Appalachian wells have been drilled by the joint venture. In addition, the Company has drilled six new coalbed methane wells in Alabama. At least eleven new Appalachian wells are planned by the joint venture over the next year and the Company plans to drill additional coalbed methane wells in Alabama. In addition, the Company is also reviewing several possible joint ventures, reserve acquisitions and drilling ventures, as well as other investments in the energy sector. The Company believes that low oil and gas prices will increase the probability that the Company can conclude a transaction or several transactions on terms favorable to the Company. There can be no assurance that oil and gas prices will decrease and remain low or that a transaction will be closed even if such prices decrease and remain low. b. Repurchase of Company Shares - as of April 30, 1998, the Company had repurchased 3,254,617 of its shares of common stock at a cost of $42,918. The Company's Board of Directors had authorized the repurchase of up to 3,750,000 shares to provide an exit vehicle for investors who want to liquidate their investment in the Company. The decision whether to repurchase additional shares will depend upon the market price of the Company's stock, tax considerations, the number of stockholders seeking to sell their shares and other factors. c. Recurring Dividends - the Company's Board of Directors adopted a policy of paying a $.60 per share annual dividend ($.15 per share quarterly) in June of 1997. The Company expects to continue to pay such dividend until the Board of Directors, in its sole discretion, changes such policy. -16- An estimate of the Company's expected cash resources and obligations from April 1, 1998 to September 30, 1999, the fiscal year end during which the Lone Star Contract expires, is as follows: Expected Cash Resources: ("000's" Omitted) Cash on hand - April 1, 1998.......................... $37,090 Cash flow - gas marketing and remaining exploration and production operations......................... 32,612 Repayment of Penn Octane Corporation note............. 1,000 Proceeds from platinum recovery - IRLP................ 800 Proceeds from SWAP litigation - IRLP.................. 703 Proceeds from American Western note................... 2,919 Interest.............................................. 6,345 ------- 81,469 ------- Expected Cash Obligations: New drilling.......................................... 2,791 Purchase of 5,000 shares of common stock of the Company from April 1, 1998 to May 11, 1998................ 80 Quarterly dividends (based on outstanding shares at May 11,1998)...................................... 3,190 Assumed IRLP payment of vendors and funding of environmental reserves............................ 4,422 ------- 10,483 ------- Excess of Expected Cash Resources Over Expected Cash Obligations....................................... $70,986 ======= The foregoing estimates assume that the Company's operations and expected cash flow will not be affected by any of the risk factors listed below: a. Contingent environmental liabilities b. Vendor liabilities of the Company's inactive refining subsidiaries c. Larry Long Litigation d. Credit risk - Lone Star e. Supply risk - MGNG f. Price risk - gas supply g. Gas contract litigation - Lone Star, MGNG h. Public market for Company's stock i. Future of the Company j. Year 2000 risk - accounting and operations k. Other risks including general business risks, insurance claims against the Company in excess of insurance recoveries, tax liabilities resulting from tax audits, drilling risks and litigation risk. In addition, Lone Star has recently informed the Company that it intends to limit daily deliveries under the Lone Star Contract to precise nominated quantities rather than a reasonable allowance in excess of such nominated quantities. The Company and Lone Star are currently negotiating this point. If the Company is unsuccessful the Company could incur a loss on the sale of gas in excess of quantities nominated by Lone Star. Although the Company does not anticipate a material loss, such may not be the case. -17- UPRC has recently terminated employees responsible for the UPRC deliveries of the Company's gas to Lone Star. If deliveries to Lone Star are hindered by related pipeline operations problems, the Company could fail to deliver amounts of gas nominated by Lone Star and by so doing lose the high gross margins realized on the sale of such gas. Finally, the Company has assumed its note due from Penn Octane Corporation will be paid on its due date, June 30, 1998. To date, all interest on the note has been paid. Penn Octane has sought to obtain financing and agreed to repay the Company's note with the proceeds thereof. So far Penn Octane has not been successful in obtaining financing and therefore there can be no assurance that the Company's note will be repaid at June 30, 1998 or thereafter. Readers should refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations Section of the Company's Form 10-K for the fiscal year ended September 30, 1997 for a detailed description of the aforementioned risk factors. If any or several of these risks materialize, the Company's estimated cash flow and results of operations will probably be adversely impacted and the impact may be material. The estimated cash flow above assumes none of these risks materializes. Given the number and variety of risks and the litigiousness of today's corporate world, it is reasonably possible that one or more of these risks may occur. -18- PART II. OTHER INFORMATION Item 1. Legal Proceedings For information regarding lawsuits, reference is made to Item 3 of the Company's Form 10-K (Annual Report) for the fiscal year ended September 30, 1997. Also see Note 4 to the March 31, 1998 financial statements included in Part I. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: Exhibit 10-124 - Asset Purchase Agreement, dated February 27, 1998 by and between Castle Energy Corporation and Alexander Allen, Inc. Exhibit 11.1 - Statement re: Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (B) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 11, 1998 CASTLE ENERGY CORPORATION /s/ Richard E. Staedtler ------------------------- Richard E. Staedtler Chief Financial Officer Chief Accounting Officer -20- EX-10.124 2 EXHIBIT 10-124 THIRD ASSET PURCHASE AGREEMENT ------------------------------ THIS THIRD ASSET PURCHASE AGREEMENT, dated February 27, 1998, by and between CASTLE ENERGY CORPORATION, a Delaware Corporation ("CEC"), and ALEXANDER-ALLEN, INC., a Pennsylvania corporation ("AAI"), W I T N E S E T H : - - - - - - - - - BACKGROUND. AAI is the former direct or indirect corporate parent of, and is the present successor by merger to, AAI Refining & Marketing Company of Alabama, Inc., a Delaware corporation ("R&M"), and GAMXX Energy, Inc., a Louisiana corporation ("GAMXX"). In March of 1987, GAMXX entered into various agreements (collectively, the "Lloyds Documents") with Lloyds Bank plc and Lloyds International Trading Limited (collectively, "Lloyds") pursuant to which Lloyds then and thereafter made loans and extended other credit to GAMXX (collectively, the "Lloyds Loans"). The Lloyds Loans were secured by (i) a first mortgage lien on the land and improvements constituting a crude oil refinery owned by GAMXX and located in Theodore, Alabama (the "Refinery"), (ii) a second mortgage lien on the land and improvements constituting a crude oil terminal facility also owned by GAMXX and also located in Theodore, Alabama (the "Terminal"), and (iii) a security interest in all personal property of GAMXX (all of such property, together with all other rights or interest of Lloyds, of any nature whatsoever, in any property of GAMXX, of any nature whatsoever, being herein called the "Lloyds Collateral"). In August of 1989, GAMXX and R&M filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the proceedings resulting thereby being hereinafter called the "GAMXX Bankruptcy"). In February of 1990, pursuant to a Loan Purchase Agreement, made as of December 29, 1989, and related documentation, CEC purchased from Lloyds all of Lloyds' interest in the Lloyds Documents, the Lloyds Loans and the Lloyds Collateral (collectively, the "Lloyds Assets"). By Agreement dated September 21, 1990 (the "1990 Agreement"), AAI agreed, subject to the conditions stated therein, to transfer to CEC all of AAI's interest in all capital stock of R&M, GAMXX or any reorganized debtor resulting from the GAMXX Bankruptcy (the "Reorganized Debtor"). Pursuant to a Third Amended Joint Plan of Reorganization in the GAMXX Bankruptcy, confirmed on November 13, 1990 (the "Plan"), in satisfaction of its claims in the GAMXX Bankruptcy, but subject to the terms and conditions of the Plan, the "Castle Funding Group", as defined in the Plan, of which CEC is the only member, was entitled to have issued to it forty-three percent of the common stock of the Reorganized Debtor (hereinafter CEC and the Castle Funding Group are collectively referred to as "Castle"). All present equity interests, if any, of Castle in AAI (whether as the Reorganized Debtor or 2 otherwise), R&M or GAMXX, together with all rights, if any, of Castle hereafter to receive (whether pursuant to the 1990 Agreement, the Plan or otherwise) any equity interest in any such entity, are herein called the "Equity Assets". All obligations (other than those included among the Lloyds Assets or relating to the Equity Assets), if any, of whatsoever nature, of AAI (whether as the Reorganized Debtor or otherwise), R&M or GAMXX to Castle, or any affiliate of Castle, are herein called the "Other Assets". By Asset Purchase Agreement dated May 24, 1994, ("May 24, 1994, Agreement") Castle agreed to sell to AAI all of Castle's right, title and interest in and to the Lloyds Assets, the Equity Assets and the Other Assets (collectively, the "Assets"), without recourse except as specifically provided for in the May 24, 1994 Agreement. The May 24, 1994 Agreement expired in accordance with its terms without the sale contemplated thereby having occurred. On May 1, 1995, Castle and AAI entered into a second Asset Purchase Agreement ("Second Agreement") in which Castle agreed to sell to AAI all of Castle's right, title and interest in and the Assets, without recourse except as specifically permitted in the Second Agreement. The Second Agreement expired in accordance with its terms without the sale contemplated thereby having occurred. AAI believes that it has arranged for the necessary funding for the restart and rehabilitation of the Refinery and is desirous of acquiring the Assets from Castle. 3 Castle remains willing to cooperate with AAI in its efforts to restart the Refinery and remains willing to sell the Assets to AAI. AAI wishes to purchase the Assets from Castle, and Castle wishes to sell the Assets to AAI, on the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged hereby, the parties hereto agree as follows: 1) Sale of the Assets. a) Subject to the terms and conditions of this Agreement, on the Closing Date (as such term is defined in Paragraph 3 hereof), Castle shall sell and assign, and AAI shall purchase and acquire, all of Castle's right, title and interest in and to the Assets, without recourse except as expressly provided for in this Agreement. b) The sale and assignment of the Assets as herein contemplated shall be effected by Castle's delivery to AAI, on the Closing Date, of all original documents in Castle's possession, or under its control, that relate to the Assets, together with such endorsements, assignments and other instruments of transfer and assignment as shall be necessary or appropriate to transfer and assign the Assets to AAI on the Closing Date as contemplated by this Agreement, without warranty or representation except as set forth in this Agreement, all as more fully set forth in Paragraph 7 hereof. Castle agrees to execute such documents and take such further action as may be reasonably required from time to time 4 thereafter to better effect or perfect the sale, assignment and transfer referred to above and to assure to AAI the rights intended to be granted by this Agreement. 2) Purchase Price. In consideration of the sale and assignment of the Assets contemplated by this Agreement, AAI shall pay Castle, at the Closing, by wire transfer or bank check, in immediately available funds, a purchase price of One Million Thousand Dollars ($1,000,000). 3) Closing. a) The closing of the transactions contemplated by this Agreement (the "Closing") shall be on or before the date of AAI's execution of Loan Documents with the Retirement Systems of Alabama and Dimeling, Schriver & Park (or its nominees) committing $25,500,000 for the rehabilitation and restart of the Refinery (the "Closing Date"); provided, however, that in no event shall the Closing Date be later than April 30, 1998. b) The Closing shall be held on the Closing Date at the offices of Ehmann, Van Denbergh & Trainor, P.C., Two Penn Center Plaza, Suite 725, Philadelphia, Pennsylvania 19102, or at such other place as may be agreed to in writing by AAI and Castle. c) If the Closing shall not have occurred, for whatever reason, by midnight, Philadelphia time, on the Closing Date, either party hereto may unilaterally terminate this Agreement, whereupon neither of such parties will have any further rights or obligations hereunder, except as may be set forth in Paragraph 13 hereof. 5 4) Representations, Warranties and Covenants of CEC. CEC represents, warrants and covenants to AAI as follows: a) CEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. b) CEC has all requisite power and authority, corporate and otherwise, to enter into this Agreement and all other instruments being executed by it pursuant hereto (hereinafter collectively referred to as the "Other Documents"), and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the other documents, and the performance by CEC of its obligations hereunder and thereunder, have been duly and validly authorized by all necessary corporate action of CEC, and no further action or approval, corporate or otherwise, is required in order to constitute this Agreement and the other documents as legally valid and binding obligations of CEC enforceable against it in accordance with their terms. c) This Agreement has been, and each of the Other Documents will be, executed and delivered by the duly authorized officers of CEC, and this Agreement does, and the other documents will, constitute the legal, valid and binding obligations of CEC enforceable against CEC in accordance with their respective terms. d) The execution and delivery of this Agreement and each of the other documents, and the performance by CEC of its obligations hereunder and thereunder, (i) do not and will not conflict with or violate any provision of the charter or by-laws of CEC, (ii) do not and will not conflict with, or result in any breach of, or constitute a default under, any contract, 6 agreement, order, judgment or decree to which CEC is a party, or which is, or purports to be, binding upon CEC, and (iii) will not be in violation of any statute, law, rule or regulation applicable to CEC; provided, however, that CEC makes no representation as to any approval, consent or authorization that may be required of any governmental body to effect the transaction contemplated hereby. e) No action, approval, consent or authorization of any third party is necessary or required in connection with the execution and delivery of this Agreement and any of the other documents and the performance by CEC of its obligations hereunder or thereunder, or in order to constitute this Agreement and each of the Other Documents as legally valid and binding obligations of CEC enforceable against CEC in accordance with their terms; provided, however, that CEC makes no representation as to any approval, consent or authorization that may be required of any governmental body to effect the transaction contemplated hereby. f) As of the date hereof, CEC has not sold, assigned, pledged, hypothecated, or otherwise transferred or encumbered any of the Lloyds Assets, Equity Assets and Other Assets or any interest therein to any other person, and such Assets are free and clear of any claims or other encumbrances in favor of any third party. 7 g) There are no actions or proceedings pending against CEC before any court or governmental agency that directly relate to the Lloyds Assets, Equity Assets or Other Assets. h) Except as specifically provided to the contrary in Paragraph 8(a) hereof, CEC agrees that, pending the Closing, it will not take any action which is likely to have the effect of preventing the occurrence of the Closing on the Closing Date; however, notwithstanding anything in this Paragraph 4(h) or Paragraph 8(a) to the contrary, nothing herein shall require Castle to advance or provide any funds to AAI or any of its affiliates. i) Except as expressly set forth above, Castle makes no representations and warranties, including, without limitation, representations or warranties as to (i) the legality, validity, enforceability, perfection or priority of the Assets, (ii) the collectability of the Lloyds Loans, or (iii) any defenses, counterclaims, rights of set-off or other claims that anyone has asserted or hereafter may assert as a defense to the collectability of the Lloyds Loans. 5) Representations, Warranties and Covenants of AAI. AAI hereby represents, warrants and covenants to Castle as follows: a) AAI is a corporation duly organized, validly existing and in good standing under the laws of Pennsylvania. b) AAI has all requisite power and authority, corporate and otherwise, to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement, and the performance by AAI of its obligations hereunder, have been duly authorized by all necessary corporate action of AAI, and no further action or approval, 8 corporate or otherwise, is required in order to constitute this Agreement as the valid, binding and enforceable obligation of AAI. c) This Agreement has been executed and delivered by the duly authorized officers of AAI and constitutes the legal, valid and binding obligation of AAI enforceable against AAI in accordance with its terms. d) The execution and delivery of this Agreement, and the performance by AAI of its obligations hereunder, (i) do not and will not conflict with or violate any provision of the charter or by-laws of AAI, (ii) do not and will not conflict with, or result in any breach of, or constitute a default under, any contract, agreement, order, judgment or decree to which AAI is a party, or which is, or purports to be, binding upon AAI, and (iii) will not be in violation of any statute, law, rule or regulation applicable to AAI. e) No action, approval, consent or authorization (including without limitation any action, approval, consent or authorization by, or filing with, any governmental or quasi-governmental agency, commission, board, bureau or instrumentality) is necessary or required in connection with the execution and delivery of this Agreement and the performance by AAI of its obligations hereunder, or in order to constitute this Agreement as the valid, binding and enforceable obligation of AAI. f) There are no actions or proceedings pending against AAI before any Court or governmental agency that will prevent AAI from consummating this Agreement. 9 6) Conditions to Execution of This Agreement. The obligation of Castle to execute this Agreement shall be subject to its receipt from AAI of a fully executed Release in the form attached hereto as Exhibit "A". The Release shall survive the termination of this Agreement should a Closing not occur, but shall be superseded by that form of Mutual Release attached hereto as Exhibit "C" should the Closing occur consistent with this Agreement. 7) Conditions of Closing. a) The obligation of AAI to close hereunder shall be subject to the fulfillment and satisfaction, prior to or at the Closing, of the following conditions, or the written waiver thereof by AAI: i) The certificates, representations and warranties of Castle in this Agreement shall be true and correct in all material respects on and as of the Closing Date. ii) Each of the agreements of Castle to be performed under this Agreement at or prior to the Closing Date shall have been duly performed in all material respects. iii) AAI shall have received, fully executed and, where appropriate, in recordable form, all without recourse, except as expressly provided for elsewhere herein, the following: (a) Non-Recourse Assignment of Loan Purchase Agreement (attached as Exhibit "B-1"). (b) Assignment of Obligations and Mortgage (attached hereto as Exhibit "B-2"). 10 (c) Bill of Sale (attached hereto as Exhibit "B-3"). (d) UCC-3 Assignment of Financing Statements for filing with the Secretary of State of Alabama and Judge of Probate, Mobile County, Alabama (attached hereto as Exhibit "B-4"). (e) Assignment of Petroleum Purchase Note (attached hereto as Exhibit "B-5"). iv) AAI shall have received a fully executed Mutual Release, substantially in the form of Exhibit "C", attached hereto and made a part hereof, effective as of the Closing Date, upon the surrender of the Release referred to in Paragraph 6 hereof. b) The obligation of Castle to close hereunder shall be subject to the fulfillment and satisfaction, prior to or at the Closing, of the following conditions or the written waiver thereof by Castle: i) The representations and warranties of AAI in this Agreement shall be true and correct in all material respects on and as of the Closing Date. ii) Each of the agreements of AAI to be performed under this Agreement at or prior to the Closing Date shall have been duly performed in all material respects. iii) Castle shall have received the full amount of the Purchase Price as provided in Paragraph 2 hereof. 11 iv) Castle shall have received, fully executed and, where appropriate, in recordable form, the following: (a) Non-Recourse Assignment of Loan Purchase Agreement (attached as Exhibit "B-1"). (b) Assignment of Obligations and Mortgage (attached hereto as Exhibit "B-2"). (c) Bill of Sale (attached hereto as Exhibit "B-3"). (d) UCC-3 Assignment of Financing Statements for filing with the Secretary of State of Alabama and Judge of Probate, Mobile County, Alabama (attached hereto as Exhibit "B-4"). (e) Assignment of Petroleum Purchase Note (attached hereto as Exhibit "B-5"). v) Castle shall have received a fully executed Mutual Release, substantially in the form of Exhibit "C", attached hereto and made a part hereof, effective as of the Closing Date. 8) Cooperation Post-Execution. a) From and after the date of this Agreement until the termination of this Agreement pursuant to Paragraph 3(c) above, Castle, its officers, directors, employees, agents, successors and assigns agree not to take, or cause to be taken, either directly or indirectly, any action which interferes with any efforts by AAI to raise such funds as are necessary to 12 meet the obligation of the Plan Funders (as that term is defined in the Plan). Notwithstanding the foregoing, nothing contained in this Paragraph 8(a) shall preclude Castle from selling the Assets to any third party pursuant to the terms of Paragraph 11. b) Should this Agreement be terminated pursuant to Paragraphs 3(c) or 11 hereof, AAI, its officers, directors, agents, successors and assigns, hereby agree, at no out of pocket cost to them, to fully cooperate with and to take all reasonable steps which may be requested by Castle, or any of its affiliates, to dispose of or otherwise sell, lease, refinance, refurbish or operate the Refinery or to dispose of the Assets or any portion thereof. 9) Acknowledgment of Existing Agreements. a) AAI hereby acknowledges and affirms the existence and validity of the following: i) Castle's ownership of an $9,389,008 security interest in the Lloyds Collateral pursuant to Section 4(B) of the Plan. ii) Castle's claim to 43% of the common stock of the Reorganized Debtor and/or AAI pursuant to Section 2(A)(1) of the Plan. iii) The 1990 Agreement. iv) The agreement dated September 24, 1992 by and among Castle, AAI, AAI Refining and Marketing Company of Alabama, Inc. and GAMXX Energy, Inc. (the "1992 Agreement"). v) The post termination provisions of the May 24, 1994 Agreement. 13 vi) Release dated May 24, 1994 given by AAI unto Castle. vii) Release dated May 1, 1995 given by AAI unto Castle. b) Castle hereby acknowledges and affirms the existence and validity of the following: i) The Plan. ii) The 1990 Agreement. iii) The 1992 Agreement. iv) The post termination provisions of the May 24, 1994 Agreement. v) The post termination provisions of the Second Agreement. 10) Indemnification. a) By AAI. From and after the Closing Date: i) AAI shall defend and promptly indemnify Castle and save it harmless against, for and in respect of, and shall pay all damages, losses, obligations, liabilities, claims, encumbrances, deficiencies, costs and expenses (including, without limitation, reasonable attorneys' fees and other costs and expenses incident to any action, investigation, claim or proceeding) suffered, sustained, incurred or required to be paid by Castle by reason of AAI's breach of any of its covenants, representations or warranties contained in this Agreement. 14 ii) AAI shall indemnify, defend and hold harmless Castle from and against all suits, actions, legal or administrative proceedings, claims, demands, damages, losses, costs, liabilities, interest, expenses, and reasonable attorneys' fees (including any such expenses and attorneys' fees incurred in enforcing this indemnity) (collectively, "Liabilities"), including Liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq., as now in effect or as hereafter amended) ("CERCLA"), brought by any governmental entity or any other party: (A) resulting from, or in any way connected with the presence of, in, on or under the Refinery or the Terminal of any: (I) hazardous substances (as defined by CERCLA); (II) hazardous wastes (as defined by the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., as now in effect or as hereafter amended); (III) oils, radioactive materials, asbestos in any form or condition; or (IV) any pollutant or contaminant or hazardous, dangerous or toxic chemicals, materials or substances within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirements relating to or imposing Liabilities or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or materials, all as now in effect or hereafter amended (herein, (I), (II), (III), and (IV) shall be referred to collectively as "Contaminants"); OR (B) resulting from or in any way connected with the operations of the Refinery or the Terminal involving or in any way relating to Contaminants; provided, however, that the indemnification of this Paragraph 10(a)(ii) shall only apply 15 to that period of time preceding Castle's refurbishment and/or operation of the Refinery pursuant to Paragraph 8(b) above. b) By Castle. From and after the Closing Date, Castle shall defend and promptly indemnify AAI and save and hold it harmless from, against, for and in respect of, and pay all damages, losses, obligations, liabilities, claims, encumbrances, deficiencies, costs and expenses (including without limitation, reasonable attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding) suffered, sustained, incurred or required to be paid by AAI by reason of Castle's breach of any of its covenants, representations or warranties contained in this Agreement. Castle's obligation to indemnify AAI under this Paragraph 10(b)(i) shall be limited to the Purchase Price. c) Procedures. For purposes of this Paragraph 10, the party entitled to indemnification shall be known as the "Injured Party" and the party required to indemnify shall be known as the "Other Party". In the event that the Other Party shall be obligated to the Injured Party pursuant to this Paragraph 10, or in the event that a suit, action, investigation, claim or proceeding is begun, made or instituted as a result of which the Other Party may become obligated to the Injured Party hereunder, the Injured Party shall give prompt written notice to the Other Party of the occurrence of such event. The Other Party agrees to defend, contest or otherwise protect the Injured Party against any such suit, action, investigation, claim or proceeding at the Other Party's own cost and expense. The Injured Party shall have the right, but not the obligation, to participate 16 at its own expense in the defense thereof by counsel of its own choice. In the event that the Other Party fails to timely defend, contest or otherwise protect the Injured Party against any such suit, action, investigation, claim or proceeding, the Injured Party shall have the right to defend, contest or otherwise protect against the same and may make any compromise or settlement thereof and recover the entire cost thereof from the Other Party, including, without limitation, reasonable attorneys' fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or compromise or settlement thereof. 11) Third Party Offer. Castle agrees that, for so long as this Agreement shall remain in effect, it will not sell the Assets except to AAI or entertain or engage in discussions with an unaffiliated third party regarding the purchase and sale of the Assets. In the event that, after the date hereof and before the earlier to occur of the Closing Date or the termination of this Agreement, Castle shall receive, from any unaffiliated third party (the "Offeror"), a bona-fide written offer to purchase all of the Assets (the "Offer"), Castle shall, within ten (10) business days of such receipt, notify AAI of that fact, which notification shall include, as an attachment thereto, a copy of the Offer. Castle shall advise such third party of the existence of this Agreement and shall thereafter take no action on or in respect of such Offer for so long as this Agreement is in full force and effect. 17 12) Consent to Jurisdiction. Each of AAI and Castle hereby consent to the service of process within, and the jurisdiction of, the United States District Court for the Eastern District of Pennsylvania for all actions that might grow out of the enforcement or interpretation of this Agreement. Service of process in any such action may be made in the manner specified in Paragraph 14(b) below. 13) Survival of Certain Provisions Post-Termination. a) The provisions of Paragraphs 6, 8(b), 9, 10, 13 and 14 and the Release attached hereto as Exhibit "A" and delivered to Castle pursuant to Paragraph 6 above shall survive the termination of this Agreement. 14) Miscellaneous. a) This Agreement and the Other Documents (including the Exhibits hereto and thereto) constitute the entire agreement of the parties with respect to the subject matter hereof. The representations, warranties and agreements set forth herein constitute all the representations, warranties and agreements of the parties hereto and upon which the parties have relied. No change, modification, addition or termination of this Agreement shall be valid unless in writing and signed by or on behalf of the party to be charged therewith. b) All notices or other communications or deliveries required or permitted to be given or made hereunder shall be in writing, shall be deemed delivered upon receipt, and shall be sent by certified mail, return 18 receipt requested and postage prepaid, or by overnight courier service, addressed as follows: If to Castle: Joseph L. Castle II Chairman and Chief Executive Officer Castle Energy Corporation Suite 250, One Radnor Corporate Center 100 Matsonford Road Radnor, PA 19087 With a copy to: Sheldon M. Bonovitz, Esquire Duane, Morris & Hecksher One Liberty Place Philadelphia, PA 19103-7396 If to AAI or its officers, directors or agents: Alexander-Allen, Inc. 1021 Lancaster Avenue, Suite 206 Bryn Mawr, PA 19010 With a copy to: C. Warren Trainor, Esquire Ehmann, Van Denbergh & Trainor Two Penn Center Plaza Suite 725 Philadelphia, PA 19102 or at such other address as either party may specify by notice given to the other party in accordance with this Paragraph 14(b). c) No waiver of any provision hereof shall be effective unless in writing and signed by the party to be charged with such waiver. No waiver shall be deemed a continuing waiver or waiver in respect of any subsequent breach or default, either of similar or different nature, unless expressly so stated in writing. 19 d) This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the Commonwealth of Pennsylvania applicable to contracts to be performed entirely within that state, without giving effect to the principles of conflicts of law. e) In addition to any other rights or remedies available to either party (the "Non-Breaching Party") as a result of any breach by the other party (the "Breaching Party") of any of its obligations under this Agreement, the Non-Breaching Party shall be entitled to enforcement of such obligations by an injunction or a decree of specific performance from a court of competent jurisdiction, and in the event that the Non-Breaching Party is successful in any suit or proceeding brought or instituted by the Non-Breaching Party to enforce any of the provisions of this Agreement, or on account of any damages sustained by the Non-Breaching Party by reason of any violation by the Breaching Party of any of the terms of this Agreement to be performed by the Breaching Party, the Breaching Party will also be liable for the payment of all attorneys' fees and expenses incurred by the Non-Breaching Party in such suit or proceeding. f) Castle and AAI shall each bear its own expenses in connection with this transaction. g) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. No party may assign any of its rights or delegate any of its duties 20 under this Agreement without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld. h) The headings or captions of sections of this Agreement are for convenience of reference only and do not in any way modify, interpret or construe the intent of the parties or affect any of the provisions of this Agreement. i) This Agreement may be executed in multiple counterparts, each of which shall constitute an original as against any party whose signature appears thereon, and all of which together shall constitute but a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of all parties. j) Facsimile signatures of this Agreement shall, upon receipt by the parties hereto, become the binding obligation of the party submitting same. However, an original signature shall follow any facsimile signature so submitted within twenty-four (24) hours after submittal of the facsimile. k) No party shall be deemed the drafter of this Agreement, and this Agreement shall not be construed against any party as such drafter. 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be entered into as of the date and year first above written. CASTLE ENERGY CORPORATION By: /s/ Joseph L. Castle II ----------------------------------- Joseph L. Castle II Chairman and Chief Executive Officer ALEXANDER-ALLEN, INC. By: /s/ Ernest B. Hardy ----------------------------------- Ernest B. Hardy, President 22 Commonwealth of Pennsylvania : County of Philadelphia : I, Ernest B. Hardy, concur in the provisions of the foregoing Agreement as though I was a party thereto. /s/ Ernest B. Hardy ------------------------------------ Ernest B. Hardy 23 EX-11.1 3 EXHIBIT 11.1 Exhibit 11.1 (1 of 2) Castle Energy Corporation Statement of Computation of Earnings Per Share (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, ---------------------------- 1998 1997 --------------------------------- -------------------------------- Basic Diluted Basic Diluted ----- ------- ----- ------- I. Shares Outstanding, Net of Treasury Stock Purchased During the Period: Stock, net 4,715,546 4,715,546 6,690,146 6,690,146 Purchase of treasury stock (weighted) (571,417) (571,417) (921,696) (921,696) Options exercised (weighted) - - 9,778 9,778 ---------- ---------- ---------- ---------- 4,144,129 4,144,129 5,778,228 5,778,228 II. Weighted Equivalent Shares: Assumed options and warrants exercised 37,115 42,004 ---------- ---------- ---------- ---------- III. Weighted Average Shares and Equivalent Shares 4,144,129 4,181,244 5,778,228 5,820,232 ========== ========== ========== ========== IV. Net Income $ 2,542 $ 2,542 $ 2,910 $ 2,910 ========== ========== ========== ========== V. Net Income Per Share $ .61 $ .61 $ .50 $ .50 ========== ========== ========== ==========
Exhibit 11.1 (2 of 2) Castle Energy Corporation Statement of Computation of Earnings Per Share (Dollars in thousands, except per share amounts) (Unaudited)
Six Months Ended March 31, -------------------------- 1998 1997 --------------------------------- --------------------------------- Basic Diluted Basic Diluted ----- ------- ----- ------- I. Shares Outstanding, Net of Treasury Stock Purchased During the Period: Stock, net 4,713,546 4,713,546 6,693,646 6,693,646 Purchase of treasury stock (weighted) (280,683) (280,683) (300,735) (300,735) Options exercised (weighted) 1,500 1,500 4,835 4,835 ------------ ------------ ------------ ------------ 4,434,363 4,434,363 6,397,746 6,397,746 II. Weighted Equivalent Shares: Assumed options and warrants exercised 31,404 32,102 ------------ ------------ ------------ ------------ III. Weighted Average Shares and Equivalent Shares 4,434,363 4,465,767 6,397,746 6,429,848 ============ ============ ============ ============ IV. Net Income $ 5,364 $ 5,364 $ 5,146 $ 5,146 ============ ============ ============ ============ V. Net Income Per Share $ 1.21 $ 1.20 $ .80 $ .80 ============ ============ ============ ============
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 INCLUDED IN PART I FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS SEP-30-1998 MAR-31-1998 $37,090 0 7,764 0 0 53,659 11,753 7,901 68,903 14,742 0 0 0 3,400 50,761 68,903 39,483 39,483 24,199 32,362 0 0 0 8,381 3,017 5,364 0 0 0 5,364 1.21 1.20
-----END PRIVACY-ENHANCED MESSAGE-----