-----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, UTwLdNqPzJDNOmLDrTPodFYS4H2a606VRNDS83AWjnCQyKNnCbsg33mzSQpfMvH+ +zI9heqgGwBx5f/kxWoMaA== 0000950116-05-003770.txt : 20051212 0000950116-05-003770.hdr.sgml : 20051212 20051212160554 ACCESSION NUMBER: 0000950116-05-003770 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051212 DATE AS OF CHANGE: 20051212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE ENERGY CORP CENTRAL INDEX KEY: 0000709355 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760035225 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10990 FILM NUMBER: 051258311 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-K 1 ten-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2005 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: 0-10990 CASTLE ENERGY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 76-0035225 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 357 South Gulph Road, Suite 260 King of Prussia, Pennsylvania 19406 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (610) 992-9900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK -- $.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]. Indicate by check mark whether Registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes ___ No _X_. As of November 25, 2005, there were 7,305,360 shares of the registrant's Common Stock ($.50 par value) outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of such date was $131,326,128 (6,893,760 shares at $19.05 per share). DOCUMENTS INCORPORATED BY REFERENCE: CASTLE ENERGY CORPORATION 2005 FORM 10-K TABLE OF CONTENTS
ITEM PAGE ---- ---- PART I 1. and 2. Business and Properties.............................................................................................. 1 3. Legal Proceedings.................................................................................................... 6 4. Submission of Matters to a Vote of Security 10 Holders............................................................... 10 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities......... 11 6. Selected Financial Data.............................................................................................. 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 14 8. Financial Statements and Supplementary Data.......................................................................... 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. 60 9A. Controls and Procedures.............................................................................................. 60 PART III 10. Directors and Executive Officers of the Registrant................................................................... 61 11. Executive Compensation............................................................................................... 64 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....................... 66 13. Certain Relationships and Related Transactions....................................................................... 68 14. Principal Accountant Fees and Services............................................................................... 68 PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................................... 69
PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES INTRODUCTION All statements other than statements of historical fact contained in this report are forward-looking statements. Forward-looking statements in this report generally are accompanied by words such as "anticipate," "believe," "estimate," or "expect" or similar statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements are disclosed in this report. All forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements in this paragraph. References to "the Company" mean Castle Energy Corporation, the parent, and/or one or more of its subsidiaries. Such references are for convenience only and are not intended to describe legal relationships. From inception (February 1981) until September 2002, the Company operated in the exploration and production segment of the energy business. During this period the Company owned interests in oil and gas wells in fourteen states in the United States and participated in the drilling of five wildcat wells in Romania. For the periods from inception until August 1989 and from June 1999 to September 6, 2002, the exploration and production segment of the energy business was the only business in which the Company operated. On May 31, 2002, the Company sold all of its domestic oil and gas properties to Delta Petroleum Corporation, another public company engaged in oil and gas exploration and production ("Delta"). On September 6, 2002, the Company sold all of its interests in Romania to the operator of its Romanian concession. Prior to these sales the Company owned interests in approximately 525 oil and gas wells in the United States and a fifty percent interest in several drilling concessions in Romania. As a result of these sales, the Company did not directly own any operating assets from September of 2002 until March 30, 2004. On March 30 and 31, 2004, the Company acquired interests in 166 gas wells in western Pennsylvania from Delta, another outside party and from several limited partnerships. The Company operates approximately 130 of the wells. During the period from August of 1989 through September 30, 1995, the Company, through certain subsidiaries, was primarily engaged in petroleum refining. Indian Refining I Limited Partnership (formerly Indian Refining Limited Partnership) ("IRLP"), an indirect wholly-owned subsidiary of the Company, owned the former Texaco Indian Refinery, an 86,000 barrel per day (B/D) refinery located in Lawrenceville, Illinois ("Indian Refinery"). In addition, Powerine Oil Company ("Powerine"), a former indirect wholly-owned subsidiary of the Company, owned and operated a 49,500 B/D refinery located in Santa Fe Springs, California ("Powerine Refinery"). By September 30, 1995, the Company's refining subsidiaries had terminated and discontinued all of their refining operations. During the period from December 31, 1992 to May 31, 1999, the Company, through two of its subsidiaries, was also engaged in natural gas marketing and transmission operations. During this period one of the Company's subsidiaries sold natural gas to Lone Star Gas Company ("Lone Star") under a long-term gas sales contract. The subsidiaries also entered into two long-term gas sales contracts and one long-term gas supply contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of MG Corp. ("MG"), whose parent was Metallgesellschaft A.G. ("MGAG"), a large German conglomerate. All of the subsidiaries' gas contracts terminated on May 31, 1999. The Company has not replaced these contracts because it sold its pipeline assets to a subsidiary of Union Pacific Resources Corporation ("UPRC") in May 1997 and because it was unable to negotiate similar profitable long-term contracts since most gas purchasers then bought gas on the spot market. In August 2000, the Company purchased thirty-five percent (35%) of the membership interests of Networked Energy LLC ("Network") for $500,000. Network is a private company engaged in the planning, installation and operation of natural gas fueled energy generating facilities that supply power, heating and cooling services directly to retail customers with significant energy consumption to reduce their energy costs - especially during peak usage periods. In March 2002, the Company invested an additional $150,000 in Network, increasing its membership interest to 45%. The Company also made a loan to Network of $125,000 at that time. Network is a start up company which earned its first revenues during the quarter ended September 30, 2004. -1- In October 1996, the Company commenced a program to repurchase shares of its common stock at stock prices beneficial to the Company. As of November 25, 2005, 4,911,044 shares had been repurchased or surrendered and the Company's Board of Directors has authorized the purchase of up to 356,946 additional shares. As of September 30, 2005, the Company's primary assets were as follows: a. $27,759,000 of unrestricted cash. b. 6,700,000 common shares of Delta, representing approximately 14% of Delta's outstanding common shares. Such shares had a market value of approximately $139,360,000 based upon the closing price of Delta's common stock on September 30, 2005. c. Oil and gas properties with an estimated market value of $14,000,000 to $17,000,000. d. A 45% membership interest in Network. Network's book value was $5,000 at September 30, 2005. e. A loan secured by a mortgage on a vacant refinery site in Theodore, Alabama formerly owned by GAMXX Energy Inc. ("GAMXX"), which the Company has agreed to sell for $3,500,000. The book value of the loan at September 30, 2005 was zero. In addition, the Company is involved in two significant lawsuits - see Item 3 - "Legal Proceedings." On November 8, 2005, the Company entered into a merger agreement (the "Merger Agreement") with Delta. Delta Petroleum Corporation, a newly-formed Delaware corporation and a wholly-owned subsidiary of Delta ("Delta-Delaware" and collectively, with Delta "Delta") and DPCA LLC, a Delaware limited liability company and a newly formed wholly-owned subsidiary of Delta ("DPCA"). Pursuant to the merger agreement, the Company will merge with and into DPCA with DPCA as the surviving company and the Company's stockholders will receive approximately 1.164 shares of Delta's common stock for each of their shares of the Company's common stock (or a total of 8,500,000 shares of Delta common stock in the aggregate) (the "Merger"). In the Merger, the 6,700,000 shares of Delta common stock currently owned by the Company will be cancelled. The Merger is designed to be a tax-free exchange for stockholders of both Delta and the Company. The boards of directors of the Company and Delta have approved the Merger. The closing of the merger is subject to approval of the Merger Agreement by the holders of a majority of the shares of the Company's outstanding common stock, review of the related prospectus by regulatory agencies, receipt of legal opinions and other customary closing conditions set forth in the Merger Agreement. The Merger Agreement contains certain termination rights for both Delta and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other a termination fee of $5,000,000 or reimburse the other party up to $1,000,000 in fees and expenses actually incurred relating to the transaction contemplated by the Merger Agreement. Concurrently with the execution of the Merger Agreement and in order to induce Delta to enter into the Merger Agreement, certain of the Company's officers and all of its directors and the estate and family of the Company's founder and former Chief Executive Officer, Joseph L. Castle II, have entered into voting agreements with Delta pursuant to which they agreed, among other things, to vote all shares of the Company's common stock held by them in favor of the adoption of the Merger Agreement and the other transactions contemplated by the Merger Agreement. The foregoing description of the Merger Agreement and the voting agreements does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement and voting agreements. The Company will file a preliminary proxy statement and a definitive proxy statement in connection with the proposed Merger with the Securities and Exchange Commission (the "SEC"). The proxy statement will be mailed to the stockholders of the Company. STOCKHOLDERS OF THE COMPANY ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT MATERIALS WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE MERGER AND THE COMPANY. Investors and security holders may obtain free copies of these documents (when they are available) and other documents filed with the SEC at the SEC's web site at www.sec.gov. -2- OIL AND GAS EXPLORATION AND PRODUCTION GENERAL The Company's significant activities during the five years ended September 30, 2005 are as follows: In April 1999, the Company purchased an option to acquire a fifty percent (50%) interest in three oil and gas concessions granted to a subsidiary of Costilla Energy Corporation, a public oil and gas exploration and production company ("Costilla"), by the Romanian government. The Company paid Costilla $65,000 for the option. In May 1999, the Company exercised the option. By September 30, 2001, the Company had participated in the drilling of five wildcat wells in Romania. Four of those wells resulted in dry holes. Although the fifth well produced some volumes of natural gas when tested, the Company was not able to obtain a sufficiently high gas price to justify future production. The Company subsequently agreed to participate in the drilling of a sixth well in the Black Sea in the spring or early summer of 2002. The drilling of the Black Sea well was postponed several times because of the lack of suitable drilling rigs. On September 6, 2002, the Company's subsidiary, which owned a 50% interest in the Romanian drilling concessions, sold all of its interests in Romania to the operator of the concessions for $1. As a result, the Company did not participate in the drilling of the wildcat well in the Black Sea, which, the Company was informed, resulted in a dry hole. On April 30, 2001, the Company consummated the purchase of several East Texas oil and gas properties from a private company. The effective date of the purchase was April 1, 2001. These properties included majority interests in twenty-one (21) operated producing oil and gas wells and interests in approximately 6,500 gross acres in three counties in East Texas. The Company estimated the proved reserves acquired to be approximately 12.5 billion cubic feet of natural gas and 191,000 barrels of crude oil. The consideration paid, net of purchase price adjustments, was $10,040,000. The Company used its own internally generated funds to make the purchase. On May 31, 2002, the Company consummated the sale of all of its domestic oil and gas properties to Delta. The sale was pursuant to a purchase and sale agreement dated January 15, 2002. At closing, the Company received $18,236,000 cash plus 9,566,000 shares of Delta's common stock. The $18,236,000 cash represented a $20,000,000 purchase price cash component as of October 1, 2001, the effective date of the sale, less $1,764,000 of net cash flow received by the Company applicable to production from the properties subsequent to the effective date. In September 2002, the Company paid Delta $194,000 as a final purchase price adjustment, effectively reducing the cash portion of the sale to $18,042,000. Pursuant to the purchase and sale agreement the Company granted Delta an option to repurchase up to 3,188,667 of Delta's shares owned by the Company at $4.50/share through May 31, 2003. Delta's option expired unexercised on May 31, 2003. The Company owned no oil and gas properties from September 6, 2002 until March 30, 2004. On March 31, 2004, the Company acquired interests in 138 western Pennsylvania gas wells from Delta. The Company previously owned most of these properties through May 31, 2002 when it sold all of its United States oil and gas properties to Delta. The effective date of the purchase was January 1, 2004. The purchase price was $8,000,000. At the same time the Company also purchased another owner's interests in the same gas properties for $334,000. The other owner's interests in the properties were approximately four percent of Delta's interests in the same properties. On March 30, 2004, the Company acquired interests in 28 western Pennsylvania gas wells for $1,100,000 from five limited partnerships. The final purchase price for all three gas property acquisitions was approximately $8,985,000 after giving effect to all purchase price adjustments and excluding $222,000 of related asset retirement obligations. The Company's petroleum reservoir engineer has estimated the proved reserves applicable to the three purchases to be approximately eight billion cubic feet of natural gas at date of purchase, of which approximately 87% represents proved producing reserves, while the remaining 13% represents behind pipe and undeveloped reserves. Approximately 130 of 166 wells in which the Company acquired interests are operated by the Company. -3- PROPERTIES Proved Oil and Gas Reserves The following is a summary of the Company's oil and gas reserves as of September 30, 2005. All estimates of reserves are based upon engineering evaluations prepared by the Company's independent petroleum reservoir engineers, Ralph E. Davis Associates, Inc., in accordance with the requirements of the SEC. Such estimates include only proved reserves. The Company reports its reserves annually to the Department of Energy. The Company's estimated reserves were as follows:
SEPTEMBER 30, ------------------------- NET MCF OF GAS: 2005 2004 ---------- ---------- Proved developed ....................................................... 7,792,341 8,081,000 Proved undeveloped ..................................................... 623,576 804,000 --------- --------- Total .................................................................. 8,415,917 8,885,000 ========= =========
Since the Company sold all of its oil and gas properties by September 30, 2002 and did not reacquire any gas properties until March 30, 2004, the Company did not directly own any oil and gas reserves at September 30, 2003. In addition, proven oil and gas revenues were indirectly attributed to the Company by virtue of the Company's ownership of Delta, which was 17.8% at September 30, 2004. Such reserves are included in the unaudited reserve disclosures in Note 13 to the consolidated financial statement included in Item 8 of this Form 10-K. Oil and Gas Production The following table summarizes the net quantities of oil and gas production of the Company for each of the three fiscal years in the period ended September 30, 2005, including production from acquired properties since the date of acquisition.
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------- 2005 2004 2003 ------- ------- --------- Oil -- Bbls (barrels).................................................. 0 0 0 Gas -- MCF (thousand cubic feet)....................................... 384,950 156,000 0
Production for the year ended September 30, 2004 only includes production from March 30, 2004 to September 30, 2004 since the Company owned no oil and gas properties from October 1, 2003 to March 29, 2004. Average Sales Price and Production Cost Per Unit The following table sets forth the average sales price per barrel of oil and MCF of gas produced by the Company and the average production cost (lifting cost) per equivalent unit of production for the periods indicated. Production costs include applicable operating costs and maintenance costs of support equipment and facilities, labor, repairs, severance taxes, property taxes, insurance, materials, supplies and fuel consumed in operating the wells and related equipment and facilities. The Company did not hedge its production during these periods.
FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------- 2005 2004 2003 ---- ----- ---- Average Sales Price per Barrel of Oil................................... N/A N/A N/A Average Sales Price per MCF of Gas...................................... $6.65 $6.96 N/A Average Production Cost per Equivalent MCF(1)........................... $1.52 $2.02 N/A
- ------------------- (1) For purposes of equivalency of units, a barrel of oil is assumed equal to six MCF of gas, based upon relative energy content. -4- No sale price or production cost data are included in the above data for the period October 1, 2002 to March 30, 2004 because the Company sold all of its producing oil and gas properties to Delta on May 31, 2002 and did not acquire gas properties until March 30, 2004. Production Wells and Acreage The following table presents the oil and gas properties in which the Company held an interest as of September 30, 2005 and 2004. The wells and acreage owned by a subsidiary of the Company are located in Pennsylvania.
AS OF AS OF SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------ ---------------------- Productive Wells:(1) GROSS(2) NET(3) GROSS(2) NET (3) --------- --------- -------- --------- Gas Wells............................................. 166 127 166 127 Oil Wells............................................. 0 0 0 0 ACREAGE: Developed Acreage..................................... 5,680 3,644 5,680 3,644 Undeveloped Acreage................................... 1,002 800 1,002 800
- ------------------- (1) A "productive well" is a producing well or a well capable of production. (2) A gross well or acre is a well or acre in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) A net well or acre is deemed to exist when the sum of fractional working interests owned in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres. The Company owned no wells or acreage at September 30, 2003. Drilling Activity The Company has not participated in the drilling of any wells since it sold all of its domestic oil and gas properties to Delta in May 2002. REGULATIONS The oil and gas exploration and production operations of the Company are subject to a number of local, state and federal environmental laws and regulations. Compliance with such regulations has not resulted in material expenditures. Most states in which the Company historically conducted and currently conducts oil and gas exploration and production activities have laws regulating the production and sale of oil and gas. Such laws and regulations generally are intended to prevent waste of oil and gas and to protect correlative rights and opportunities to produce oil and gas between owners of interests in a common reservoir. Most states also have regulations requiring permits for the drilling of wells and regulations governing the method of drilling, casing and operating wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandonment of wells. In recent years there has been a significant increase in the amount of state regulation, including increased bonding, plugging and operational requirements. Such increased state regulation resulted in increased legal and compliance costs to the Company. The Company is subject to various local, state and Federal laws regarding environmental and ecological matters because it acquired and now operates gas properties. To alleviate the environmental risk, the Company carries $5,000,000 of liability insurance. The costs of such liability insurance have increased significantly recently. Although the Company believes that the insurance it carries is adequate, such may not be the case given increased litigiousness generally. -5- EMPLOYEES AND OFFICE FACILITIES As of November 25, 2005, the Company and one of its subsidiaries employed nine personnel. The Company leases certain offices as follows: OFFICE LOCATION FUNCTION --------------- -------- King of Prussia, PA Corporate Headquarters Blue Bell, PA Accounting and Administration Oklahoma City, Oklahoma Legal The leases governing the Company's offices include standard provisions for fixed rentals plus reimbursement of allocated shares of utility costs and the right to sublease subject to landlord approval. The last office lease expires in December 2010. The lease commitments of the Company are set forth in Note 15 to the Consolidated Financial Statements in Item 8 to this Form 10-K. ITEM 3. LEGAL PROCEEDINGS ENVIRONMENTAL LIABILITIES/LITIGATION Chevron Litigation On September 20, 2005, the Company settled its long-standing litigation with Texaco Inc. and other subsidiaries of Chevron Corporation (collectively " Chevron"). In exchange for a payment of $5,750,000 by the Company, the Company negotiated a settlement agreement which provided mutual releases and a complete and comprehensive indemnification by Texaco Inc. of the Company, related entities and persons against losses or liabilities arising out of or related to the now dismantled Indian Refinery and related properties. Chevron had filed the lawsuit against the Company and two of its inactive subsidiaries in August 2002, seeking damages and declaratory relief under contractual and statutory claims arising from environmental contamination at the Indian Refinery. A now inactive subsidiary of the Company had operated that refinery for approximately five years subsequent to approximately seventy-five years of operation by Chevron. The lawsuit claimed that the Company was contractually obligated to indemnify and defend Chevron against all liability and costs, including lawsuits, claims and administrative actions initiated by the United States Environmental Protection Agency ("EPA") and others that Chevron had incurred or might incur as a result of environmental contamination at and around the Indian Refinery, even if that environmental contamination had been caused by Chevron. The suit also sought costs, damages and declaratory relief against the Company under the Federal Comprehensive Environmental Response Compensation Liability Act ("CERCLA"), the Oil Pollution Act of 1990 ("OPA") and the Solid Waste Disposal Act, as amended, ("RCRA"). Chevron had also tendered to the Company the defense of certain third party claims against Chevron in Illinois state court. The Company disputed and contested the claims made by Chevron and denied all liability. All claims in this litigation, as well as any other claims tendered by Chevron, have been resolved by the settlement and the litigation was dismissed with prejudice on October 12, 2005. At September 30, 2005, the Company accrued the $5,750,000 settlement which it paid on October 26, 2005. OTHER LITIGATION Long Trusts Lawsuit In November 2000, the Company and three of its subsidiaries were defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case, the Long Trusts, are non-operating working interest owners in certain wells previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an inactive exploration and production subsidiary of the Company. The wells were among those sold to UPRC in May 1997. The Long Trusts claimed that CTPLP did not allow them to sell gas from March 1, 1996 to January 31, 1997 as required by applicable joint operating agreements, and they sued CTPLP and the Company's other subsidiaries, claiming (among other things) breach of contract, breach of fiduciary duty, conversion and conspiracy. The Long Trusts sought actual damages, exemplary damages, prejudgment and post-judgment interest, attorney's fees and court costs. CTPLP counterclaimed for approximately $150,000 of unpaid joint interest billings plus interest, attorney's fees and court costs. -6- After a three-week trial, the District Court in Rusk County submitted 36 questions to the jury which covered the claims and counterclaim in the lawsuit. Based upon the jury's answers, the District Court entered judgment on some of the Long Trusts' claims against the Company and its subsidiaries, as well as CTPLP's counterclaim against the Long Trusts. The District Court issued an amended judgment on September 5, 2001 which became final December 19, 2001. The net amount awarded to the plaintiffs was approximately $2,700,000. The Company and its subsidiaries and the Long Trusts subsequently filed notices of appeal, submitted legal briefs in April 2002, reply briefs in June and July 2002, and ultimately argued the case before the 12th Court of Appeals in Tyler, Texas in October 2002. On July 31, 2003, that court reversed and remanded in part the trial court's judgment against the Company and its subsidiaries while affirming the judgment against the Long Trusts which had awarded damages on the counterclaim asserted by CTPLP. In its decision, the appellate court held that the trial court had submitted erroneous theories to the jury, expressly rejecting the Long Trusts' claims for breach of fiduciary duty, conversion, implied covenants and exemplary damages. It also remanded the Long Trusts' claims for breach of contract to the district court for retrial. The appellate court upheld the trial court's award to CTPLP on its counterclaim for approximately $150,000 of unpaid joint interests billings, $450,000 in attorneys' fees, plus interest and court costs. Both the Company and its subsidiaries and the Long Trusts thereafter submitted motions for a rehearing on certain rulings to the 12th Court of Appeals. That court denied both motions for a rehearing. The Long Trusts subsequently filed a petition for review with the Supreme Court of Texas. On March 26, 2004, the Texas Supreme Court denied the Long Trusts petition for review and the Long Trusts filed a petition for rehearing with that court two weeks later. That petition was also subsequently denied, whereupon the Court of Appeals issued its mandate on June 9, 2004, completing the appellate process. The supersedeas bond posted by the Company was released, along with a $4,110,000 letter of credit, including accrued interest, that secured the bond. Certain breach of contract claims by the Long Trusts which were reversed and remanded by the appellate court may be retried by the plaintiffs. Based on the evidence at the initial trial coupled with the guidance to the trial court given in the appellate decision, the Company believes that it will be able to prove that there was no breach of contract and that Long Trusts suffered no damages, and that any such breach of contract claims, even if decided adversely to the Company, will not result in a material loss to the Company. Pursuant to the mandate of the Texas Court of Appeals, the Company moved to sever CTPLP's claims against the Long Trusts from any retrial of the Long Trust's contract claims against the Company and to collect on CTPLP's judgment against the Long Trusts which is secured by a letter of credit posted by the Long Trusts with the trial court. On September 17, 2004, the Long Trusts filed a Motion for Clarification with the Court of Appeals which in essence sought to reverse that court's severance of CTPLP's claims from the retrial of the Long Trusts' breach of contract claims. The Company filed a Petition for Writ of Mandamus with the Court of Appeals on December 3, 2004, requesting that the trial court be stayed from proceeding further, and be ordered to comply with the June mandate of the Court of Appeals. On January 31, 2005, the Court of Appeals stayed the trial court from proceeding and subsequently denied the Motion for Clarification on March 3, 2005 and the Petition for Writ of Mandamus on March 16, 2005. On May 2, 2005, the trial court from the bench announced that CTPLP's severed claim would be assigned a new case number, but took all other requests for action from the parties under advisement. In August 2005, the Company filed a second Petition for Writ of Mandamus with the Court of Appeals requesting that the calculation of interest due from the Long Trusts be made without a new trial and that Long Trusts be ordered to pay the judgment against it plus interest without delay. The Company estimates the judgment to be $1,046,000, including accrued interest, as of September 30, 2005. The Company has not accrued any recoveries for this litigation as of September 30, 2005, but will record recoveries if and when they are ultimately realized (collected). -7- Pilgreen Litigation As part of the oil and gas properties acquired from AmBrit Energy Corporation ("AmBrit") in June 1999, Castle Exploration Company, Inc., a wholly-owned subsidiary of the Company ("CECI") acquired a 10.65% overriding royalty interest ("ORRI") in the Simpson lease in south Texas, including the Pilgreen #2ST gas well. CECI subsequently transferred that interest to Castle Texas Oil and Gas Limited Partnership ("CTOGLP"), an indirect wholly-owned subsidiary. Because the operator suspended revenue attributable to the ORRI from first production due to title disputes, AmBrit, the previous owner, filed claims against the operator of the Pilgreen well, and CTOGLP acquired rights in that litigation with respect to the period after January 1, 1999. In August 2002, $282,000 was released to the Company of which $249,000 was recorded as income by the Company and the remaining $33,000 paid to Delta. Because of a claim by Dominion Oklahoma Texas Exploration and Production, Inc. ("Dominion") (see below), a working interest owner in the same well, that CTOGLP's ORRI in the Simpson lease should be deemed burdened by 3.55% overriding royalty interest, there is still a title dispute as to approximately $120,000 of suspended CTOGLP Pilgreen #2ST production proceeds for the Company's account. (The Company sold all of its oil and gas assets, including the Pilgreen #2ST well, to Delta on May 31, 2002 but effective as of October 1, 2001.) The Company has named Dominion as a defendant in a legal action seeking a declaratory judgment that the Company is entitled to its full 10.65% overriding royalty interest in the Pilgreen well. The Company believes that Dominion's title exception to CTOGLP's overriding royalty interest is erroneous and notes that several previous title opinions have confirmed the validity of CTOGLP's interest. The litigation is related to the Dominion litigation (see below). The Company and its counsel are currently reviewing the effect of the Court of Appeals' opinion issued in the Dominion litigation on the Company's claims in this litigation. Since the Company has not recorded any revenue related to the $120,000 of suspended revenue, it expects to record $120,000 of revenue if and when such revenue is realized (collected), but no expense if it fails in this litigation. Christiansen Litigation CTOGLP, along with several unrelated parties, has also filed suit to collect production proceeds from an additional well on the Simpson lease in which CTOLGP had a 5.325% ORRI suspended by the operator because of title disputes. The Company intends to contest this matter vigorously. At the present time, the amount held in escrow applicable to the additional well attributable to the Company's interest is approximately $66,000 although approximately $22,000 of that amount would be subject to Dominion's claims in the Pilgreen Litigation. The Company has not recorded any of the net $44,000 of suspended revenue as income, but will record it as income when and if it is realized (collected). There is no claim or contingent liability against the Company or its subsidiaries in this matter, just a contingent gain if CTOGLP were to prevail. Dominion Litigation On March 18, 2002, Dominion, operator of the Mitchell and Migl-Mitchell wells in the Southwest Speaks field in south Texas and a working interest owner in the Pilgreen #2ST well, filed suit in Texas against CTOGLP seeking declaratory judgment in a title action that the ORRI held by CTOGLP in these wells should be deemed to be burdened by certain other ORRI's aggregating 3.55% and should therefore be reduced from 10.65% to 7.10%. Dominion is also seeking an accounting and refund of payments for overriding royalty to CTOGLP in excess of the 7.10% since April 2000. The Company currently estimates the amount in controversy to be approximately $783,000. Dominion threatened to suspend all revenue payable to the Company from the Mitchell and Migl-Mitchell to offset its claim. The Company and Dominion subsequently examined the land and lease documents concerning the ORRI's. The Company believes that Dominion's title exception to CTOGLP's ORRI is erroneous and notes that several previous title opinions have confirmed the validity of CTOGLP's interest. In July 2003, Dominion filed a motion for partial summary judgment concerning the Company's claim that it had assumed the liabilities of its predecessor in interest and CTOGLP filed its response to Dominion's motion as well as its own cross motion for partial summary judgment. In September 2003, the District Court of Lavaca County granted Dominion's partial motion for partial summary judgment. In January 2004, Dominion filed a motion for final summary judgment on this matter to which CTOGLP and the other defendants filed a response. In May 2004, the District Court of Lavaca County granted Dominion's motion for final summary judgment, following which the Company appealed both of the District Court's summary judgments to the Court of Appeals in Corpus Christi. By agreement with Dominion, CTOGLP executed a promissory note for $783,000 guaranteed by the Company and deposited this amount in a separate restricted cash account of CTOGLP to support the note and to avoid the cost of a supersedeas bond. On July 28, 2005, the Court of Appeals issued a Memorandum Opinion that affirmed Dominion's claims to reduce the ORRI, but only to take effect at a date after CTOGLP had sold the ORRI. The Court of Appeals overturned that portion of the judgment that required CTOGLP to refund any money received by it. The Company does not at this time know if Dominion intends to petition the Supreme Court of Texas for review of this decision. The promissory note issued by CTOGLP will be cancelled and the restricted cash account of CTOGLP released when and if this judgment becomes final and non-appealable. -8- In fiscal 2004, the Company recorded an $825,000 loss provision related to the Dominion litigation - primarily as a result of the District Court's granting of Dominion's motion for summary judgment in May 2004. The Company has reversed that provision plus $20,000 of accrued interest on the contingent note during fiscal 2005 primarily because the Court of Appeals reversed that District Court judgment against the Company. Nevertheless, Company's contingent note payable to Dominion and CTOGLP's restricted cash account are required to remain in place until the Appeals Court judgment becomes non-appealable. Dominion filed a petition for appeal to the Texas Supreme Court of the appellate court's decision. If the Supreme Court reverses the Appeals Court decision, the Company would then become liable for the contingent note to Dominion plus interest or some portion thereof. In such case, the Company would again record a loss provision. -9- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not hold a meeting of stockholders or otherwise submit any matter to a vote of stockholders during the fourth quarter of fiscal 2005. -10- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PRINCIPAL MARKET The Company's Common Stock is quoted on the Nasdaq National Market ("NNM") under the trading symbol "CECX." STOCK PRICE AND DIVIDEND INFORMATION Stock Price: The table below presents the high and low sales prices of the Company's Common Stock as reported by the NNM for each of the quarters during the two fiscal years ended September 30, 2005.
2005 2004 ------------------ ------------------- HIGH LOW HIGH LOW ------ ------ ------ ----- First Quarter (December 31)..................................... $13.35 $10.56 $ 7.50 $5.22 Second Quarter (March 31)....................................... $12.80 $10.36 $10.50 $7.25 Third Quarter (June 30)......................................... $13.22 $ 9.01 $14.00 $9.04 Fourth Quarter (September 30)................................... $22.00 $12.40 $15.40 $9.81
The final sale of the Company's Common Stock as reported by the NNM on November 25, 2005 was at $19.05. Dividends: On June 30, 1997, the Company's Board of Directors adopted a policy of paying regular quarterly cash dividends of $.05 per share on the Company's common stock. Commencing July 15, 1997, dividends have been paid quarterly except for the quarter ended June 30, 2002. As with any company, the declaration and payment of future dividends are subject to the discretion of the Company's Board of Directors and will depend on various factors. In addition, the Company's Board of Directors approved a special dividend of $1.00 per share which was paid in June 2005. APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of November 25, 2005, the Company's Common Stock was held by approximately 3,000 stockholders. -11- EQUITY COMPENSATION PLANS OF THE COMPANY Information with respect to outstanding options to acquire the Company's stock pursuant to equity compensation plans of the Company as of September 30, 2005 is as follows:
NUMBER OF WEIGHTED NUMBER OF SECURITIES AVERAGE SECURITIES TO BE ISSUED EXERCISE REMAINING UPON EXERCISE PRICE OF AVAILABLE OF OUTSTANDING OUTSTANDING FOR OPTIONS, OPTIONS, ISSUANCE WARRANTS WARRANTS UNDER AND RIGHTS AND RIGHTS EQUITY PLAN (1) --------------- ------------ --------------- Equity compensation plans approved by security holders........ 75,000 $6.36 1,612,500 Equity compensation plans not approved by security holders............................................... 15,000 $3.79 ------ --------- Total................................................. 90,000 $5.93 1,612,500 ====== =========
(1) Excludes shares subject to outstanding options, warrants and rights. The Company's 1992 Equity Incentive Plan was approved by stockholders and adopted by the Company in 1993. The other options issued were not pursuant to any plan. (See Note 18 to the consolidated financial statements included in Item 8 of this Form 10-K.) Subsequent to September 30, 2005, the 90,000 options outstanding at September 30, 2005 were exercised. ITEM 6. SELECTED FINANCIAL DATA During the five fiscal years ended September 30, 2005 the Company consummated a number of transactions affecting the comparability of the financial information set forth below. See Note 4 to the Company's Consolidated Financial Statements included in Item 8 of this Form 10-K. The following selected financial data have been derived from the Consolidated Financial Statements of the Company for each of the five years ended September 30, 2005. The information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of this Form 10-K. -12-
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------------ 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales: Exploration and production ........................... $2,561 $ 1,087 $9,445 $21,144 Gross Margin: Exploration and production (oil and gas sales, less production expenses)........................... $1,977 $ 772 $6,178 $13,745 Income (loss) from continuing operations, net of tax $1,801 $13,620 ($2,001) ($1,844) $ 1,716 Income (loss) from discontinued operations, net of tax................................................. ($3,392) Net income (loss)...................................... ($1,591) $13,620 ($2,001) ($1,844) $ 1,716 Income (loss) per common share: Continuing operations: Basic.............................................. $ .26 $ 2.04 ($ .30) ($ .28) $ .26 Diluted............................................ $ .26 $ 1.96 ($ .30) ($ .28) $ .25 Discontinued operations: Basic.............................................. ($ .49) Diluted............................................ ($ .49) Net income (loss) Basic.............................................. ($ .23) $ 2.04 ($ .30) ($ .28) $ .26 Diluted............................................ ($ .23) $ 1.96 ($ .30) ($ .28) $ .25 Dividends declared per share of common stock outstanding ......................................... $ 1.20 $ .20 $ .20 $ .15 $ .20
SEPTEMBER 30, ------------------------------------------------------------------ 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total assets........................................... $177,723 $83,826 $49,808 $51,941 $59,118 Long-term obligations.................................. $ 275 $ 246 Redeemable preferred stock............................. Capital leases.........................................
-13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("$000'S OMITTED EXCEPT SHARE AND PER UNIT AMOUNTS) GENERAL 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 discussed below. All forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements in this paragraph. During the period from August 1989 to September 30, 1995, two of the Company's subsidiaries conducted refining operations. By December 12, 1995, the Company's refining subsidiaries had sold all of their refining assets. In addition, Powerine merged into another company and was 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 accounted for its refining operations as discontinued operations in the Company's consolidated financial statements as of September 30, 1995 and retroactively. In September 2005, the Company settled the Chevron litigation for $5,750 and recorded a loss from discontinued operations of $3,392, net of $1,505 tax. Since November 1996, the Company has reacquired 4,911,044 shares or approximately 69% of its previously outstanding common stock (after taking into account a three-for-one stock split in January 2000). As a result of these share acquisitions, earnings and losses per outstanding share have been higher than would have been the case if no shares had been repurchased. FISCAL 2005 VERSUS FISCAL 2004 Gas sales increased $1,474 from 2004 to 2005 as a result of the Company's acquisition of 166 Appalachian gas properties on March 30 and 31, 2004 (see Note 4 to the consolidated financial statements included in this Form 10-K). The Company owned no oil and gas properties from October 1, 2003 to March 30, 2004. Production expenses increased $269 from 2004 to 2005 as a result of the Company's acquisition of 166 Appalachian gas properties on March 30, and 31, 2004 (see Note 4 to the consolidated financial statements included in this Form 10-Q). The Company owned no oil and gas properties from October 1, 2003 to March 30, 2004. Depreciation, depletion and amortization increased $256 from 2004 to 2005. The increase was entirely attributable to the gas properties acquired by the Company in March 2004. The Company owned no oil and gas properties from October 1, 2003 to March 30, 2004. General and administrative costs increased $499 or 11.3% from 2004 to 2005. The increase was primarily attributable to increased compensation costs. The $845 litigation recovery in 2005 results from the Appeal Court decision in the Dominion Litigation. This amount represents the reversal of an $825 litigation provision related to the same Dominion litigation recorded in 2004 plus $20 of interest. See Item 3 to this Form 10-K. -14- The Company's equity in Delta's net income increased $338 or 25% from 2004 to 2005. The increase was caused by Delta's increased net income, notwithstanding that the Company's percentage ownership of Delta decreased from approximately 18% at October 1, 2004 to approximately 16% at March 31, 2005 and the fact that the Company recorded no Delta equity income after March 31, 2005 (see Notes 6 and 10 to the consolidated financial statements and "Critical Accounting Policies"). Interest income increased $439 from 2004 to 2005 primarily because of increased interest rates. The gain on the sale of the Company's investment in Delta decreased $15,145 from 2004 to 2005. In 2004, the Company sold 2,948,289 shares of Delta versus only 300,000 shares in 2005. The $3,392 loss from discontinued operations in 2005 resulted from the settlement of the Chevron litigation (see Item 3 to this Form 10-K). The loss consists of the following:
Chevron litigation settlement......................................................... $5,750 Less: amount accrued for estimated environmental liabilities at settlement date....... (853) ------ Net provision for Chevron litigation.................................................. 4,897 Less: tax benefit..................................................................... (1,505) ------ $3,392 ======
The tax benefit of $493 for 2005 consists of a $1,012 tax provision allocated to continuous operations and a $1,505 tax benefit allocated to discontinued operations. The net tax benefit overall results from the tax assets created by the Company's tax losses and the probability that the Company will use such tax assets to offset the unrealized gain on the Company's 6,700,000 shares of Delta's stock. For 2004, the Company recorded a tax provision of $2,385, or 14.9% of pre-tax book income, for the period. This provision was significantly less than that which would be obtained using the Company's blended tax rate (Federal and state taxes combined) of 36% because the Company was able to utilize its tax carryforwards and was thus able to release its valuation allowance. FISCAL 2004 VERSUS FISCAL 2003 Gas sales increased $1,087 as a result of the Company's acquisition of 166 Appalachian gas properties on March 30 and 31, 2004 (see Note 4 to the consolidated financial statements included in Item 8 of this 10-K). The Company owned no oil and gas properties from September 2002 to March 30, 2004. Production expenses increased $315 as a result of the Company's acquisition of 166 Appalachian gas properties on March 30 and 31, 2004 (see Note 4). The Company owned no oil and gas properties from September 2002 to March 30, 2004. Depreciation, depletion and amortization increased $195 from fiscal 2003 to fiscal 2004. The increase was entirely attributable to depletion of the gas properties acquired by the Company in March 2004. In fiscal 2003, the Company owned no oil or gas properties. General and administrative expenses increased $867 or 24.3% from the year ended September 30, 2003 to the year ended September 30, 2004. The increase resulted primarily from increased legal costs related to the Chevron lawsuit. In addition, the Company recorded a bad debt provision of $86 for the year ended September 30, 2004 because of delays and uncertainties in the collection of estimated accounts receivable that were then over eighteen months old. No similar bad debt provision was recorded for the year ended September 30, 2003. -15- The Company recorded no gain or loss in the value of the option it granted to Delta for the year ended September 30, 2004 because that option expired unexercised on May 31, 2003. For the year ended September 30, 2003, the Company recorded a $432 gain in the value of that option. The Company had granted Delta an option to repurchase 3,188,667 of the Delta shares held by the Company at $4.50/share until May 31, 2003 as part of the sale of its domestic oil and gas properties to Delta on May 31, 2002. The Company owned 17.8% of Delta on September 30, 2004. The Company recorded no portion of the loss of Network for the year ended September 30, 2004 because the Company had recorded a $354 impairment provision on its equity investment in Network and a $126 allowance for doubtful accounts on its note receivable from Network at March 31, 2003, reducing both amounts to zero. The Company has no obligation to fund Network's future losses. For the year ended September 30, 2004, Network's loss was $4. The Company owns 45% of Network. For the year ended September 30, 2003, the Company recorded $20 as its portion of Network's loss. The Company's equity in Delta's net income increased $285 or 26.7% from the year ended September 30, 2003 to the year ended September 30, 2004. The increase was caused by Delta's increased net income, excluding the $1,782 gain recorded by Delta on its sale of its Appalachian properties to the Company, notwithstanding that the Company's percentage ownership of Delta decreased from approximately 39% at September 30, 2003 to 17.8% at September 30, 2004. The Company did not record any portion of Delta's gain on the Appalachian property sale because intercompany profits are eliminated under the equity method (see Notes 4 and 10). During the year ended September 30, 2004, the Company sold all of its holdings in Penn Octane Corporation ("Penn Octane"), constituting 1,343,600 shares of common stock of Penn Octane, for $2,809, resulting in a gain on the sale of $538. As a result of the sale, the Company's only remaining marketable securities consist of 354 shares of Chevron, which had a market value of $19 at September 30, 2004. In addition, during the year ended September 30, 2004, the Company sold 2,948,289 shares of Delta for $29,339, resulting in a gain of $18,211 (see Note 10). There were no such sales during the year ended September 30, 2003. For the year ended September 30, 2004, the Company recorded a tax provision of $2,385 or 14.9% of pre-tax book income for the period. This provision was significantly less than that which would be obtained using the Company's blended tax rate (Federal and state taxes combined) of 36% because the Company was able to utilize its tax carryforwards and was thus able to release its valuation allowance. The $349 tax benefit for the year ended September 30, 2003 resulted primarily because of changes in the Company's expectations concerning future taxable income. LIQUIDITY AND CAPITAL RESOURCES During the year ended September 30, 2005, $4,035 was used in operating activities. During the same period the Company paid $8,612 for dividends to stockholders. During the same period the Company received $4,800 in proceeds from the sale of part of its investment in Delta and $1,985 from the exercise of stock options. At September 30, 2005, the Company had $27,759 of unrestricted cash, $22,349 of working capital and no long-term debt. -16- At September 30, 2005, the Company's contractual obligations were as follows: PAYMENTS DUE BY PERIODS STARTING OCTOBER 1, 2005 ------------------------------------------------ LESS THAN 2-3 4-5 AFTER 5 1 YEAR YEARS YEARS YEARS TOTAL ------- ----- ----- ------- ------ Operating leases................. $184 $357 $213 $ 14 $ 768 Asset retirement obligations..... 3 6 6 242 257 ---- ---- ---- ---- ----- $187 $363 $219 $256 $1025 ==== ==== ==== ==== ===== As noted in Item 1 to this Form 10-K, the Company entered into the Merger Agreement on November 8, 2005. Pursuant to that agreement, the Company is to merge into a subsidiary of Delta. Closing is expected by February 28, 2006, but that date could be delayed or accelerated by regulatory approvals and other factors beyond the Company's control. If the Company or Delta terminates the planned merger, it is likely that the Company will liquidate although it may continue to operate. Accordingly, the discussion below addresses all three alternatives: completion of the merger into Delta, liquidation and continuing to operate. Merger into Delta Pursuant to the Merger Agreement (see Item 1 to this Form 10-K), the Company would merge into a subsidiary of Delta, all of the Company's outstanding shares of common stock would be cancelled and the Company's stockholders would receive 8,500,000 shares of Delta or approximately 1.164 shares of Delta for each share of the Company's outstanding common stock. As part of the merger, Delta would also reacquire the 6,700,000 shares of Delta's stock the Company currently owns, resulting in a net issuance of 1,800,000 shares by Delta. The risks that the merger will not be consummated include but are not limited to the following: a. The stockholders of the Company do not approve the merger (approval of Delta's stockholders is not required). b. Regulatory reviews or other factors will delay the merger past April 1, 2006, in which case either party can terminate the merger without penalty or prevent the merger from being consummated. c. The requisite legal opinions and regulatory approvals will not be received. d. Either the Company or Delta unintentionally or intentionally does not consummate the merger despite penalty provisions of up $1,000 and $5,000, respectively, in such cases. Although the Company will consider termination if Delta's stock price were to decline precipitously before closing despite the $5,000 penalty, the Company may nevertheless decide to complete the transaction under such circumstances for two primary reasons. First, approximately 75%-80% of the Company's current value is in the 6,700,000 shares of Delta stock that the Company already holds and thus the Company is already an investor in Delta to the extent of those 6,700,000 shares. Furthermore, pursuant to the Merger Agreement (see Item 1 to this Form 10-K), the Company has agreed not to dispose of these shares before the merger is consummated. Second, by effecting the merger, the Company will avoid income taxes on the unrealized gain on its 6,700,000 Delta shares. At September 30, 2005, such gain was approximately $120,900 and the related income taxes approximately $42,300 (before offset by tax carryforwards). Nevertheless, if the Company's directors believe that Delta's stock price will decline significantly in the future and remain depressed, they may elect to terminate the merger, pay the required penalty and sell or distribute Delta's stock to the Company's stockholders after paying the related income taxes on such sale or distribution. -17- Even if the Company intends to complete the merger, it is possible that Delta may elect to terminate the merger despite the penalty provisions. Whether the merger is terminated by the Company or Delta, the Company would have to decide whether to liquidate or continue to operate if such were the case. If the merger is completed, the future risk factors applicable to the Company's stockholders become primarily those concerning Delta - not those concerning the Company, whose separate corporate existence would cease upon merging into a subsidiary of Delta. The risk factors concerning Delta's operations and stock are described in Delta's Form 10-K for the year ended June 30, 2005. Such factors include but are not limited to changes in oil and gas prices, drilling and exploration and production risks, Delta's ability to finance its planned drilling activities, Delta's compliance with its debt covenants, severe weather threats to Delta's production in the Gulf Coast region of the United States, Delta's policy of paying no dividends on its common stock and other factors. These risk factors will be discussed in greater detail in the proxy statement/prospectus that will be sent to the Company's stockholders in connection with their consideration of the proposed merger. If the merger is completed as anticipated, the Company's stockholders will own stock in a company whose assets and liabilities consist of Delta's assets and liabilities and the Company's assets and liabilities excluding the 6,700,000 Delta shares owned by the Company prior to the merger. As a result, the price of the Delta shares to be owned by the Company's stockholders will depend to a large degree upon the subsequent operations of Delta and the factors noted above concerning Delta. Since the Company's non-cash assets, which Delta will receive under the merger agreement, are immaterial compared to Delta's assets, the performance and value of the Company's non-cash asset (oil and gas properties, investment in GAMXX, investment in Network) are not expected to have a material effect on Delta's performance after the merger. If Delta's post-merger stock price declines, such decline will affect the value received by the Company's stockholders. Although Delta's average trading volume is currently in excess of 400,000 shares daily versus only approximately 15,000 average shares daily for the Company's stock, Delta's stock price could decline after the merger if a large number of the Company's stockholders or Delta stockholders attempt to sell their shares shortly after the merger thus depressing the demand for the stock. Liquidation If the merger is not completed as planned it is probable that the Company would liquidate given its small market capitalization, limited operating assets, the cost to acquire additional operating assets in the current environment and the ever-increasing regulatory and other costs of remaining a public company. If a decision is made to liquidate, the Company anticipates that it would distribute some cash and/or Delta shares to its stockholders in complete liquidation of their stock as soon as possible while retaining sufficient assets to reasonably provide for existing and anticipated future liabilities, including those related to the current litigation. Such provision would include sufficient assets to provide a reasonable reserve for the Company's current litigation in the event the Company were to receive an adverse judgment. If any net assets remain after the Company pays or provides for such remaining liabilities, the net proceeds of such assets would then be distributed to stockholders as a final distribution. The Company would probably also file a no action letter with the SEC seeking relief from continuing SEC reporting requirements during the winding down of its business. Such a plan of liquidation or any other plan of liquidation would be subject to prior approval by the Company's stockholders. The primary risks and costs associated with such a liquidation scenario are as follows: a. Litigation - As noted above, the Company remains a defendant in two unsettled lawsuits. Although the Company does not believe it has any material liabilities with respect to either of these lawsuits and expects to receive a recovery in the Long Trusts' litigation (see Item 3 to this Form 10-K), any or several of the plaintiffs in these lawsuits could undertake legal actions to delay such litigation or to prevent the Company from making liquidating distributions to its stockholders and/or delay resolution of related litigation. Any resulting litigation could not only cause the Company to incur significant legal costs but could also delay any distributions to stockholders for years and/or reduce such distributions. In addition, even if the Company's stockholders approve any future plan of liquidation, dissident stockholders of the Company could conceivably also take legal actions to prevent the Company from implementing any liquidation plan. b. Tax Risks - The Company currently owns 6,700,000 shares of Delta. The Company's tax basis in such Delta shares is approximately $18,500. Such Delta shares constitute the Company's largest asset. If the Company sells its Delta stock or distributes the Delta stock to its stockholders in liquidation or as a special dividend, the Company will incur a tax liability equal to approximately 35% of the difference between the Company's tax basis and the fair market value of the 6,700,000 Delta shares on the date of distribution. If the Company distributes Delta stock to its stockholders, the tax treatment would be the same as if the Company had sold its Delta shares for their fair market value and then distributed the proceeds to it stockholders. -18- At September 30, 2005, the Company's unrealized appreciation on its Delta stock was approximately $120,900 and the related tax liability approximately $42,300 (before offset by approximately $4,100 of tax carryforwards). Any such tax income tax liability would significantly reduce distributions available to stockholders. Furthermore, if Delta's stock price increases, income taxes payable by the Company upon distribution of Delta stock would also increase. c. Continuing Public Company Administrative Burden - If the Company's directors decide to liquidate, the Company will probably seek relief from most of its public company reporting requirements. If such a request is denied by the SEC, the Company would continue incurring the costs of being a public company while having fewer or no operating revenues to absorb such costs. Such costs are significant and probably will increase in the future given the myriad of post-Enron regulatory requirements that are currently being mandated. The result would be a diminution of assets available for distribution to stockholders. For example, commencing October 1, 2006, the Company would face internal control attestation requirements and the costs to comply with such requirements could easily exceed $500 initially. d. Lack of Liquidity - If the Company's directors decide to liquidate and the related plan of liquidation is approved by the Company's stockholders, it is likely that the Company's stock would cease to trade in the Nasdaq National Market after the plan of liquidation is approved. In such case, stockholders would not be able to trade their stock. Stockholders who have used their Company stock as collateral for margin loans would probably be required to provide other collateral to support such loans. Even if the Company is able to distribute Delta stock as part of its initial distribution to stockholders without any legal challenges or other delays, there could be a delay between the date the Company's stock is delisted and the date when the Company' stockholders receive Delta shares that could be substituted as collateral for a margin loan. Stockholders would presumably have to provide other collateral in the interim. Suspension of trading would probably also cause suspension of SEC reporting. e. Liquidation of Assets - The Company's primary remaining assets consist of cash and cash equivalents and the Company's investment in Delta (6,700,000 shares). The Company also owns an investment in Network and a lender's interest in GAMXX. Although the value of the Company's gas properties has recently increased as the price of natural gas increased, the value of such properties could decline before the Company is able to sell such properties. Although natural gas prices are currently at historic highs, such prices have fluctuated significantly recently often increasing or decreasing in a short period. Network is a private development stage limited liability company with no public market for its membership units. Network only recently generated its first revenue producing contracts and has only recently been marginally profitable. As noted above, Delta's stock has been highly volatile fluctuating from $8.99/share to over $21.00 per share during the last year. The amount realized on any sale of the Company's Delta stock would be largely determined by the price of Delta's stock at the time of any sale. Increases or decreases in the price of Delta's stock at the time of sale or distribution to stockholders would, however, be partially offset by increases or decreases in any resulting income tax liability to the Company. f. Legal Uncertainties in Litigation - There is little case law and precedent under applicable Delaware statutes concerning liquidation of a profitable public company such as the Company. Several years may be required to liquidate and application of governing laws may be uncertain. -19- Continuing to Operate If the Company does not merge with Delta or liquidate but instead continues to operate, it would be subject to oil and gas price risks, drilling risks, production risks, litigation risks, insurance coverage risks and other general risks inherent in the oil and gas business. In addition, the Company would continue to be exposed to the continuing public company administrative and regulatory burden. At the present time, the Company estimates its annual public company administrative costs to be $600-$800. When the Company becomes subject to internal control attestation requirements (currently expected to be October 1, 2006), such annual public company costs are expected to increase significantly. In addition, the Company faces risks related to its experienced employees. If one or more of its key employees departs, the Company believes it would be extremely difficult to replace such employees since most experienced oil and gas employees reside in areas where the oil and gas industry is concentrated - not in the Philadelphia area where the Company has most of its offices. Finally, the Company's existing gas operations are minuscule compared to those of its competitors yet the Company incurs substantial fixed costs to provide the requisite legal, accounting and production systems to operate and account for its production and to comply with public company reporting requirements. If the Company continues to operate, it would be faced with the prospect of acquiring more oil and gas assets to justify its fixed overhead at a time when the prices being paid for oil and gas properties are high, making such investment more risky than previously. Under such circumstances the Company may find it impossible to make the economically justifiable acquisitions it needs to rationalize its fixed operating and public company costs. In addition to the foregoing, if the Company continued to operate it would face risks related to the lack of liquidity for its stockholders (see above discussion under "Liquidation"). At the present time, the Company's anticipated future cash expenditures are primarily recurring general and administrative costs, including legal costs (see Item 3 this Form 10-K), recurring dividends and lease operating costs related to the Appalachian gas properties acquired by the Company (see Note 4 to the consolidated financial statements included in Item 8 to this Form 10-K). In addition, the Company would review possible future acquisitions of oil and gas properties and, if the Company is successful in such pursuits, additional expenditures would be required. To the extent that such anticipated expenditures cannot be funded from cash flow from the Company's oil and gas operations, the Company could fund such expenditures using its available cash. If the Company were to make another substantial acquisition at a price in excess of its current cash and other excess liquid working capital, the Company believes it could fund such acquisitions by selling additional shares of Delta or by renewing its previous oil and gas borrowing arrangements with an energy bank and using the related loan proceeds for the acquisition. The Company's future operations would be subject to the following risks: a. Litigation - As noted above, the Company is still a defendant in two significant unsettled lawsuits. Although the Company does not believe it has any material liabilities with respect to any of these lawsuits, the Company could incur significant liabilities if it ultimately is judged to be liable in these lawsuits. This litigation could cause the Company to incur significant legal costs. b. Exploration and Production Price Risk - The Company has not hedged any of its anticipated future gas production because the cost to do so appears excessive when compared to the risk involved. As a result, the Company remains exposed to future gas price changes with respect to all of its anticipated future gas production. Such exposure could be significant given the volatility of gas prices. For example, natural gas prices have increased over 50% from 2002 to 2005 and could either increase or decrease a similar percentage in the future. When the Company acquired its gas properties in March 2004, the prices being received for natural gas were $5.00 to $6.00 per mcf sold. The Company paid for its gas reserve acquisitions using such pricing. If natural gas prices decrease in the future, the decrease will directly impact the Company's gas sales, operating income and net income. In addition, if gas prices are low at the end of the Company's quarterly and annual reporting periods, the value of the Company's gas reserves may decrease such that the Company would be forced to record an impairment provision. See "Critical Accounting Policies" below. c. Exploration and Production Operating Risk - All of the Company's current gas properties are onshore properties with relatively low operating risk. Nevertheless, the Company faces the risks encountered from operating approximately 130 gas wells - including the risk of gas leaks, resulting environmental damage, third party liability claims related to operations, including those in excess of the Company's liability insurance coverage and including claims by landowners where the operated wells are located, as well as other general operating risks. -20- d. Public Market for the Company's Stock - Although there presently exists a market for the Company's stock, such market is volatile and the Company's stock is thinly traded. This volatility may adversely affect the market price and liquidity of the Company's common stock. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK On March 30 and 31, 2004, the Company acquired interests in Pennsylvania gas wells (see Note 4 to the consolidated financial statements included in Item 8 to this form 10-K). The Company has not hedged its share of the expected natural gas production from these wells. As a result, the Company remains at risk with respect to such unhedged expected production. If market prices increase, gas sales applicable to the unhedged production will increase. If market prices decrease, gas sales related to such unhedged production will decrease. At September 30, 2005, the Company owned 6,700,000 shares of Delta. The stock price of Delta has fluctuated significantly in the last three years and thus the market value of the Company's investment in Delta remains subject to changes in the market price of Delta stock. The Company has not hedged its market risk with respect to its Delta stock. INFLATION AND CHANGING PRICES Gas sales prices are determined by markets locally and worldwide and often move inversely to inflation. In the last three years gas prices have increased over 50%. At September 30, 2005, such prices reached historic highs. In prior periods such prices have decreased significantly - often over a very short period of time. Since the Company has not hedged its future gas production, gas revenues, operating income (loss) and net income (loss) are subject to changes in gas prices. Inflation has not had and is not expected to have a material effect on the Company's results of operations. NEW ACCOUNTING PRONOUNCEMENTS On September 28, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 106 ("SAB No. 106"). SAB No. 106 applies to companies using the full cost method of accounting for oil and gas properties and equipment costs, such as the Company. SAB No. 106 affects the way in which the Company calculates its full cost ceiling limitation (the Company now excludes future cash outflows associated with settling asset retirement obligations that are accrued on the balance sheet related to proved developed properties in the calculation of the ceiling) and the way the Company calculates depletion on its proved undeveloped gas properties. The Company adopted SAB No. 106 on October 1, 2004. The effects of adoption of SAB No. 106 to date have been immaterial. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement. Pursuant to a delay in the implementation date by the SEC, SFAS No. 123(R) will be effective for the Company beginning October 1, 2005. The Company does not expect SFAS No. 123(R) to have any impact on its results of operations. The Company has not issued any stock options since January 2002 and all stock options issued were vested by July 31, 2002. In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of FAS 154 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. -21- In March 2005, the FASB issued FASB Interpretation 47 ("FIN 47 "), an interpretation of SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143 "). FIN 47 clarifies the term "conditional asset retirement obligation" as it is used in SFAS No. 143. The Company expects to apply the guidance of FIN 47 commencing October 1, 2005 and expects no impact on its financial statements. CRITICAL ACCOUNTING POLICIES: The accounting policies critical to the Company are as follows: FULL COST METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES The Company follows the full-cost method of accounting for oil and gas properties and equipment costs. Under this method of accounting, net capitalized costs, less related deferred income taxes, in excess of the present value of net future cash inflows (oil and gas sales less production expenses) from proved reserves, tax effected and discounted at 10%, and the cost of properties not being amortized, if any, are charged to expense (full cost ceiling test). If at a future reporting date oil and gas prices decline, it is possible that the Company's book value will exceed the allowable full cost ceiling and the Company would have to write down its oil and gas properties. Even if oil and gas prices subsequently increase, the write down would not be restored under the full cost method of accounting. Although the Company recorded no full cost ceiling provision through September 30, 2005, it could be required to record such a provision in the future - especially if there were a significant decrease in gas prices by the end of a quarterly or annual financial reporting period. METHOD OF ACCOUNTING FOR INVESTMENT IN DELTA The Company currently owns 6,700,000 shares of Delta. Through March 31, 2005, the Company accounted for its investment in Delta using the equity method of accounting. Under this method the Company increased its investment by its share of Delta's income and decreased its investment by its share of Delta's losses and distributions. The Company also increased its investment for increases in its share of Delta's equity as a result of Delta's issuances of additional Delta equity at prices in excess of the Company's book value. Effective April 1, 2005, the Company commenced accounting for its investment in Delta as a marketable available-for-sale security (see Notes 6 and 10 to the consolidated financial statements). As a result, commencing April 1, 2005, pursuant to Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company measures its investment in Delta's stock at fair market value (closing prices per the stock exchange) with unrealized gains or losses, net of taxes, recorded in other comprehensive income until the stock is sold or otherwise disposed of. At such time gain or loss will be included in earnings. A decline in the market value of any available for sale security below cost that is deemed to be other than temporary will result in a reduction in the carrying amount to fair value. The impairment will be charged to earnings and a new cost basis for the security will result. Accordingly, the future effect of any change in the market value of Delta stock will affect the Company's equity but will not be recorded in operations until the stock is actually sold or disposed of. -22- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Statements of Operations for the Years Ended September 30, 2005, 2004 and 2003................. 24 Consolidated Balance Sheets as of September 30, 2005 and 2004............................................... 25 Consolidated Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003................. 26 Consolidated Statements of Stockholders' Equity and Other Comprehensive Income for the Years Ended September 30, 2005, 2004 and 2003................................................................... 28 Notes to the Consolidated Financial Statements.............................................................. 29 Report of Independent Registered Public Accounting Firm..................................................... 58 Report of Independent Registered Public Accounting Firm..................................................... 59
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. -23- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 2005 2004 2003 ---------- ----------- ----------- Revenues: Gas sales ............................................................... $ 2,561 $ 1,087 ----------- ----------- 2,561 1,087 ----------- ----------- Expenses: Gas production .......................................................... 584 315 General and administrative .............................................. 4,931 4,432 $ 3,565 Depreciation, depletion and amortization ................................ 507 251 56 Litigation provision (recovery) ......................................... (845) 825 ----------- ----------- ----------- 5,177 5,823 3,621 ----------- ----------- ----------- Operating income (loss) ................................................... (2,616) (4,736) (3,621) ----------- ----------- ----------- Other income (expense): Gain on sale of marketable securities ................................... 538 Gain on sale of Delta Petroleum Corporation investment .................. 3,066 18,211 Interest income ......................................................... 647 208 255 Other income ............................................................ 21 432 17 Impairment provision - investment in Networked Energy LLC ................................................................... (480) Decrease in fair value of option granted to Delta Petroleum Corporation ................................................. 432 Equity in income (loss) of Networked Energy LLC ......................... 5 (20) Equity in income (loss) of Delta Petroleum Corporation 1,690 1,352 1,067 ----------- ----------- ----------- 5,429 20,741 1,271 ----------- ----------- ----------- Income (loss) from continuing operations before provision for (benefit of) income taxes ............................................... 2,813 16,005 (2,350) ----------- ----------- ----------- Provision for (benefit of) income taxes: State ................................................................... 29 63 (10) Federal ................................................................. 983 2,322 (339) ----------- ----------- ----------- 1,012 2,385 (349) ----------- ----------- ----------- Net income (loss) from continuing operations .............................. 1,801 13,620 (2,001) Income (loss) from discontinued refining operations, less applicable income tax benefit of $1,505 ................................. (3,392) ----------- ----------- ----------- Net income (loss) ......................................................... ($ 1,591) $ 13,620 ($ 2,001) =========== =========== =========== Net income (loss) per share:- Continuing operations: Basic ................................................................. $ .26 $ 2.04 ($ .30) =========== =========== =========== Diluted ............................................................... $ .26 $ 1.96 ($ .30) =========== =========== =========== Discontinued operations: Basic ................................................................. ($ .49) =========== Diluted ............................................................... ($ .49) =========== Net income (loss) Basic ................................................................. ($ .23) $ 2.04 ($ .30) =========== =========== =========== Diluted ............................................................... ($ .23) $ 1.96 ($ .30) =========== =========== =========== Weighted average number of common and potential dilutive common shares outstanding: Basic ................................................................. 7,052,693 6,675,538 6,592,884 =========== =========== =========== Diluted ............................................................... 7,052,693 6,933,982 6,592,884 =========== =========== =========== Dividends declared per share .............................................. $ 1.20 $ .20 $ .20 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements -24- CASTLE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, ---------------------------- 2005 2004 ---------- ---------- ASSETS Current assets: Cash and cash equivalents......................................................... $ 27,759 $ 33,742 Restricted cash................................................................... 898 120 Accounts receivable............................................................... 674 582 Account receivable - Delta Petroleum Corporation.................................. 339 Marketable securities............................................................. 23 19 Prepaid expenses and other current assets......................................... 252 203 Note receivable - Networked Energy LLC, net of allowance for doubtful account of $126 ........................................................................ ---------- ---------- Total current assets............................................................ 29,606 35,005 Property, plant and equipment, net: Furniture, fixtures, equipment and vehicles....................................... 188 111 Oil and gas properties, net (full cost method): Proved properties............................................................... 8,564 9,012 Marketable securities................................................................ 139,360 Investment in Networked Energy LLC, net of impairment reserve of $354................ 5 Investment in Delta Petroleum Corporation (equity method)............................ 39,698 ---------- ---------- Total assets..................................................................... $ 177,723 $ 83,826 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Dividend payable.................................................................. $ 361 $ 343 Accounts payable.................................................................. 667 749 Accrued expenses.................................................................. 476 906 Litigation settlement payable on discontinued refining operations................. 5,750 Asset retirement obligations 3 3 ---------- ---------- Total current liabilities...................................................... 7,257 2,001 Net refining liabilities (assets) retained........................................... 2,404 Asset retirement obligations......................................................... 254 227 Deferred income taxes................................................................ 39,422 5,171 Other liabilities.................................................................... 21 19 ---------- ---------- Total liabilities.............................................................. 46,954 9,822 ---------- ---------- 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; 12,126,404 shares issued at September 30, 2005 and 11,781,404 shares issued at September 30, 2004............................................................. 6,064 5,891 Additional paid-in capital 88,500 85,691 Accumulated other comprehensive income, net of taxes.............................. 64,172 170 Retained earnings................................................................. 38,700 48,919 ---------- ---------- 197,436 140,671 Treasury stock at cost - 4,911,044 shares at September 30, 2005 and 4,911,020 shares at September 30, 2004..................................................... (66,667) (66,667) ---------- ---------- Total stockholders' equity..................................................... 130,769 74,004 ---------- ---------- Total liabilities and stockholders' equity..................................... $ 177,723 $ 83,826 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements -25- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ------------------------------------- 2005 2004 2003 -------- ------- ------- Cash flows from operating activities: Net income (loss)............................................................. ($ 1,591) $13,620 ($2,001) -------- ------- ------- Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Accretion of discount - asset retirement obligations...................... 17 Provision for bad debts................................................... 86 Depreciation, depletion and amortization.................................. 507 251 56 Write offs - property, plant and equipment................................ 32 Decrease in fair value of option granted to Delta Petroleum Corporation... (432) Gain on sale of marketable securities..................................... (538) Gain on sale of investment in Delta Petroleum Corporation................. (3,066) (18,211) Deferred income tax expense (benefit) (463) 2,047 (349) Impairment of investment in Networked Energy LLC.......................... 480 Equity in (income) loss of Networked Energy LLC........................... (5) 20 Equity in (income) loss of Delta Petroleum Corporation.................... (1,690) (1,352) (1,067) Changes in assets and liabilities: (Increase) decrease in restricted cash.................................. (778) 4,165 (55) (Increase) decrease in accounts receivable.............................. 247 (499) (44) (Increase) decrease in prepaid expenses and other current assets........ (49) (81) 85 Increase (decrease) in accounts payable................................. (82) 208 128 Increase (decrease) in accrued expenses................................. (430) 665 (322) Increase (decrease) in other long-term liabilities...................... 2 19 (11) Increase (decrease) in litigation settlement payable.................... 5,750 Increase (decrease) in net refining liabilities (assets) retained....... (2,404) -------- ------- ------- Total adjustments..................................................... (2,444) (13,240) (1,479) -------- ------- ------- Net cash flow provided by (used in) operating activities.............. (4,035) 380 (3,480) -------- ------- ------- Cash flows from investing activities: Proceeds from sale of marketable securities................................... 2,809 Proceeds from sale of investment in Delta Petroleum Corporation............... 4,800 29,339 Investment in gas properties.................................................. (9,341) Investment in Networked Energy LLC............................................ (125) Purchase of furniture, fixtures and equipment................................. (128) (102) Other......................................................................... 7 2 2 -------- ------- ------- Net cash provided by (used in) investing activities................... 4,679 22,707 (123) -------- ------- -------
(continued on next page) The accompanying notes are an integral part of these consolidated financial statements -26- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ("$000'S" OMITTED) (continued from previous page)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 2005 2004 2003 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from exercise of stock options....................................... 1,985 1,371 Dividends paid to stockholders ............................................... (8,612) (1,331) (1,321) -------- -------- -------- Net cash provided by (used in) financing activities......................... (6,627) 40 (1,321) -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................ (5,983) 23,127 (4,924) Cash and cash equivalents - beginning of period................................. 33,742 10,615 15,539 -------- -------- -------- Cash and cash equivalents - end of period....................................... $ 27,759 $ 33,742 $ 10,615 ======== ======== ======== Supplemental disclosures of cash flow information are as follows: Cash paid during the period: Income taxes................................................................ $ 350 $ 13 ======== ======== ======== Accrued dividends ............................................................ $ 361 $ 343 $ 330 ======== ======== ======== Unrealized gain (loss) on investment in available-for-sale marketable securities, net of $35,811 taxes in 2005.................................... $ 64,172 $ 666 ======== ======== Issuance of additional equity by Delta Petroleum Corporation and option expense credited directly to paid-in-capital by Delta, net of $180, $4,595 and $0 of income taxes in 2005, 2004 and 2003, respectively................. $ 320 $ 15,459 $ 1,167 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements -27- CASTLE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS) ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 --------------------------------------------------------------------------------------------- ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY STOCK ------------------- PAID-IN COMPREHENSIVE COMPREHENSIVE RETAINED ------------------ SHARES AMOUNT CAPITAL INCOME (LOSS) INCOME (LOSS) EARNINGS SHARES AMOUNT TOTAL ---------- ------ --------- ------------- ------------- -------- --------- -------- ------- Balance - October 1, 2002............ 11,503,904 $5,752 $67,365 $ 487 $ 39,965 4,911,020 ($66,667)$46,902 Issuance of additional stock by Delta Petroleum Corporation 1,167 1,167 Dividends declared ($.20 per share).. (1,321) (1,321) Comprehensive income (loss): Net income (loss).................. ($ 2,001) (2,001) (2,001) Other comprehensive income (loss): Unrealized gain (loss) on marketable securities, net of $375 of income taxes............. 666 666 666 Equity in other comprehensive income (loss) of Delta Petroleum Corporation, net of $129 tax benefit............... 230 230 230 Total comprehensive income (loss).... ------- ($1,105) ---------- ------ ------- ======= ----- -------- --------- -------- ------- Balance - September 30, 2003......... 11,503,904 5,752 68,532 1,383 36,643 4,911,020 (66,667) 45,643 Options exercised.................... 277,500 139 1,232 1,371 Tax benefit of options exercised..... 468 468 Issuance of additional stock by Delta Petroleum Corporation, net of $4,595 tax.................. 15,459 15,459 Dividends declared ($.20 per share).. (1,344) (1,344) Comprehensive income (loss): Net income (loss)................... $13,620 13,620 13,620 Other comprehensive income (loss): Reclassification adjustment, net of $649 tax................. (1,153) (1,153) (1,153) Equity in other comprehensive income (loss) of Delta Petroleum Corporation, net of $32 tax benefit. (60) (60) (60) ---------- ------ ------- ------- ----- -------- --------- -------- ------- Total comprehensive income (loss)... $12,407 ======= Balance - September 30, 2004........ 11,781,404 5,891 85,691 170 48,919 4,911,020 (66,667) 74,004 Treasury stock surrendered.......... 24 Options exercised................... 345,000 173 1,812 1,985 Tax benefit of options exercised.... 677 677 Issuance of additional stock by Delta Petroleum Corporation, net of $180 tax................... 320 320 Dividends declared ($1.20 per share) (8,628) (8,628) Comprehensive income (loss): Net income (loss)................. ($ 1,591) (1,591) (1,591) Other comprehensive income (loss): Equity in other comprehensive income (loss) of Delta Petroleum Corporation, net of $600 tax benefit........... (1,067) (1,067) (1,067) Reversal of cumulative equity in comprehensive income (loss) of Delta as of April 1, 2005, net of $506 tax............... 900 900 900 Unrealized gain on marketable securities, net of $35,811 tax........................... 64,169 64,169 64,169 ---------- ------ ------- ------- ------- ------- --------- -------- -------- Total comprehensive income (loss)... $62,411 ======= Balance - September 30, 2005........ 12,126,404 $6,064 $88,500 $64,172 $38,700 4,911,044 ($66,667) $130,769 ========== ====== ======= ======= ======= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements -28- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) NOTE 1 - BUSINESS AND ORGANIZATION BUSINESS References to Company mean Castle Energy Corporation, the parent, and/or one or more of its subsidiaries. Such references are for convenience only and are not intended to describe legal relationships. Castle Energy Corporation (the "Company") is a public company incorporated in Delaware. Mrs. Joseph L. Castle wife of the deceased past Chairman of the Board and Chief Executive Officer, Joseph L. Castle II, and the estate of Mr. Castle owned 20.7% of the Company's outstanding common stock at September 30, 2005. Mr. Castle passed away on August 15, 2005. MERGER INTO DELTA On November 8, 2005, the Company entered into a merger agreement (the "Merger Agreement") with Delta. Delta Petroleum Corporation, a newly-formed Delaware corporation and a wholly-owned subsidiary of Delta ("Delta-Delaware" and collectively, with Delta "Delta") and DPCA LLC, a Delaware limited liability company and a newly formed wholly-owned subsidiary of Delta ("DPCA"). Pursuant to the merger agreement, the Company will merge with and into DPCA with DPCA as the surviving company and the Company's stockholders will receive approximately 1.164 shares of Delta's common stock for each of their shares of the Company's common stock, (or a total of 8,500,000 shares of Delta common stock in the aggregate) (the "Merger"). In the merger, the 6,700,000 shares of Delta common stock currently owned by the Company will be cancelled. The Merger is designed to be a tax-free exchange for stockholders of both Delta and the Company. The boards of directors of the Company and Delta have approved the Merger. The closing of the merger is subject to approval of the Merger Agreement by the holders of a majority of the shares of the Company's outstanding common stock, review by regulatory agencies, receipt of legal opinions and other customary closing conditions set forth in the Merger Agreement. The Merger Agreement contains certain termination rights for both Delta and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other a termination fee of $5,000 or reimburse the other party up to $1,000 in fees and expenses actually incurred relating to the transaction contemplated by the Merger Agreement. Concurrently with the execution of the Merger Agreement and in order to induce Delta to enter into the Merger Agreement, certain of the Company's officers and all of its directors and the estate and family of the Company's founder and former Chief Executive Officer, Joseph L. Castle II, entered into voting agreements with Delta pursuant to which they agree, among other things, to vote all shares of the Company's common stock held by them in favor of the adoption of the Merger Agreement and the other transactions contemplated by the Merger Agreement. EXPLORATION AND PRODUCTION From inception until May 31, 2002, the Company was engaged in the exploration and production segment of the energy business. On May 31, 2002, the Company sold all of its domestic oil and gas properties to Delta Petroleum Corporation, another public exploration and production company ("Delta"). On September 6, 2002, a subsidiary of the Company sold all of its interests in oil and gas concessions in Romania to the operator of the Romanian concessions. From September 2002 until March 30, 2004, the Company owned no oil and gas properties or other operating assets. On March 30 and March 31, 2004, the Company acquired interests in 166 gas wells in western Pennsylvania (see Note 4.) -29- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) NATURAL GAS MARKETING In December 1992, the Company acquired a long-term natural gas sales contract with Lone Star Gas Company ("Lone Star Contract") and a gas pipeline. The Company also entered into two long-term gas sales contracts and one long-term gas purchase contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of MG Corp. ("MG"), which, in turn, is a United States subsidiary of Metallgesellschaft A.G. ("MGAG"), a German conglomerate. In May 1997, the Company sold its natural gas pipeline to a subsidiary of Union Pacific Resources Corporation ("UPRC") and thus exited the gas transmission business while still conducting gas marketing operations. Effective May 31, 1999, the aforementioned gas sales and gas purchase contracts expired by their own terms and were not replaced by other third party gas marketing business. With the exception of the Long Trusts Lawsuit (see Note 15), the Company and its subsidiaries are not involved with any matters related to their former natural gas marketing business. REFINING IRLP The Company indirectly entered the refining business in 1989 when one of its subsidiaries acquired the operating assets of an idle refinery located in Lawrenceville, Illinois (the "Indian Refinery"). The Indian Refinery was subsequently operated by one of the Company's subsidiaries, Indian Refining I Limited Partnership ("IRLP"), until September 30, 1995 when it was shut down. On December 12, 1995, IRLP sold the Indian Refinery assets to American Western Refining, L.P. ("American Western"). American Western subsequently filed for bankruptcy and sold the Indian Refinery to an outside party which has substantially dismantled it. American Western subsequently filed a Plan of Liquidation. In April 2003, American Western's Plan of Liquidation was confirmed by the bankruptcy court and IRLP subsequently received $599 which it distributed to its creditors. In August 2002, Texaco Inc. and certain other subsidiaries of Chevron Corporation (collectively "Chevron") sued the Company and two of its inactive subsidiaries, including IRLP, concerning environmental liabilities related to the Indian Refinery. In September 2005, the Company and its subsidiaries settled the lawsuit for $5,750 (see Note 3). NETWORKED ENERGY LLC In August 2000, the Company purchased thirty-five percent (35%) of the membership interests of Networked Energy LLC ("Network") for $500. Network is a private company engaged in the operation of energy facilities that supply power, heating and cooling services directly to retail customers. In March 2002, the Company invested an additional $150 in Network's equity, increasing its interest to 45%, and made a $125 loan to Network. In March 2003, the Company recorded a $480 impairment reserve with respect to its investment in and loan to Network, reducing the value of same to zero. Network recorded its first revenues and first profit for the quarter ended September 30, 2004 (see Note 9). FUTURE OF THE COMPANY After the sale of all of the Company's domestic oil and gas properties to Delta in 2002, the Company's management and Board of Directors considered liquidation of the Company and distribution of the Company's assets to its stockholders. Consideration of liquidation was suspended as a result of the lawsuit filed against the Company by Chevron (see Note 3). As a result of this lawsuit and management's decision not to liquidate, the Company sought acquisitions in the energy industry and acquired interests in 166 western Pennsylvania gas wells in March of 2004. In September 2005, the Company settled the Chevron litigation. (See Note 3) On November 8, 2005, the Company entered into the Merger Agreement. If the merger is not consummated, the Company's directors anticipate that the Company will probably liquidate although it may continue to operate. -30- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The significant accounting policies discussed are limited to those applicable to the business segments in which the Company operated during the fiscal years ended September 30, 2005, 2004 and 2003. During those periods, the Company operated in the exploration and production segment of the energy business. As a result of the Chevron litigation settlement in September 2005, the Company also recorded a loss from discontinued refining operations during the fiscal year ended September 30, 2005. (See Note 3 to the consolidated financial statements.) PRINCIPLES OF CONSOLIDATION The consolidated financial statements presented include the accounts of the Company and all of its subsidiaries. All intercompany transactions have been eliminated in consolidation. REVENUE RECOGNITION Oil and gas revenues are recorded under the sales method when oil and gas production volumes are delivered to the purchaser. Reimbursement of costs from well operations is netted against the related oil and gas production expenses. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments, such as time deposits and money market instruments, purchased with a maturity of three months or less, to be cash equivalents. (See Note 5) MARKETABLE SECURITIES The Company currently classifies its investment securities, including its investment in Delta, as available-for-sale securities. Pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," ("SFAS 115"), such securities are measured at fair market value in the financial statements with unrealized gains or losses recorded in other comprehensive income until the securities are sold or otherwise disposed of. At such time gain or loss is included in earnings. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security results. Until April 1, 2005, the Company accounted for its investment in Delta on the equity method (see below). The Company accounts for its investment in Network on the equity method. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are depreciated on a straight-line basis over periods of three to ten years and rolling stock is depreciated on a straight-line basis over three years. Such periods are the estimated useful lives of such furniture, fixtures and equipment. OIL AND GAS PROPERTIES The Company follows the full-cost method of accounting for oil and gas properties and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Capitalized costs are amortized on a composite unit-of-production method by country using estimates of proved reserves. Capitalized costs which relate to unevaluated oil and gas properties are not amortized until proved reserves are associated with such costs or impairment of the related property occurs. Net capitalized costs, less related deferred income taxes, in excess of the present value of net future cash inflows (oil and gas sales less production expenses) from proved reserves plus the lower of cost or market of unevaluated properties, tax-effected and discounted at 10%, and the cost of properties not being amortized, if any, are charged to current expense. -31- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) ENVIRONMENTAL COSTS The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future expected economic benefit to the Company. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. Environmental liabilities are accrued on an undiscounted basis unless the aggregate amount of the obligation and the amount and timing of the cash payments are fixed and reliably determined for that site. Contingent environmental liabilities are recorded at their estimated settlement values, including estimated legal costs to contest such liabilities. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets other than oil and gas properties for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset might not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair market value of the asset. Impairment for oil and gas properties is computed in the manner described above under "Oil and Gas Properties." HEDGING ACTIVITIES The Company has not used hedges during the periods reported. GAS BALANCING The Company follows the "sales method" of accounting for its natural gas and crude oil revenue, so that the Company recognizes sales revenue on all natural gas or crude oil sold to its purchasers, regardless of whether the sales are proportionate to the Company's ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than the expected remaining proved reserves. Gas balancing activities have been immaterial during the periods reported. ASSET RETIREMENT OBLIGATIONS The Company follows the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement costs to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS No. 143 requires that asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company recorded an asset retirement obligation of $222 in conjunction with its acquisition of interests in gas wells on March 31, 2004 (see Note 4). At September 30, 2005, the asset retirement obligation was $257 with the change from the initial amount recorded resulting primarily from accretion expense. (See Note 8) -32- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) INVESTMENTS IN NETWORK AND DELTA The Company's investment in Network (the Company owned 45% of Network at September 30, 2005) is recorded using the equity method. Under this method, the Company records its share of Network's income or loss and other comprehensive income (loss) with an offsetting entry to the carrying value of the Company's investment. Cash distributions, if any, are recorded as reductions in the carrying value of the Company's investment. If Network issues additional equity at prices different than that of the Company's investment, the Company would record such difference, net of tax, as a charge or credit to the Company's investment with the offsetting entry to "Paid-In-Capital." At March 31, 2003, the Company recorded a $480 impairment provision related to its investment in Network, reducing the book value of such investment to zero. (See Note 9) Through March 31, 2005, the Company also accounted for its investment in Delta using the equity method. Initially, in May 2002, the Company had owned 44% of Delta and three of the Company's directors constituted three of seven Delta directors. By April 1, 2005, the Company's ownership of Delta had decreased to 16% (approximately 15% fully diluted) and the Company's directors only comprised two of nine Delta directors. As a result of these developments, the Company believed it no longer had significant influence on Delta's management and thus, effective April 1, 2005, the Company commenced accounting for its investment in Delta as a marketable available-for-sale security (see above). As a result of the change in accounting method, the book value of the Company's investment in Delta and the Company's cumulative equity in Delta's comprehensive income (loss) at April 1, 2005, under the equity method of accounting, $39,892, became the Company's value of the Delta stock as a marketable security on April 1, 2005. At September 30, 2005, the Company owned approximately 14% of Delta and one of the Company's directors was also a director of Delta, whose board of directors currently consists of nine directors. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes net income and all changes in an enterprise's other comprehensive income including, among other things, unrealized gains and losses on certain investments in debt and equity securities. STOCK BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation," allows an entity to continue to measure compensation costs in accordance with Accounting Principle Board Opinion No. 25 ("APB 25"). The Company has elected to continue to measure compensation cost in accordance with APB 25 and to comply with the required disclosure-only provisions of SFAS 123. Proforma net income and earnings per share had the Company accounted for its options under the fair value method of SFAS 123 would not change from the net income and earnings per share amounts presented as the Company has not issued any stock options since January 2002 and all options were vested by July 31, 2002. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements and tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than anticipated enactments of changes in the tax law or tax rates. SFAS No.109 also requires that deferred tax assets, if any, be reduced by a valuation allowance based upon whether realization of such deferred tax asset is or is not more likely than not. (See Note 19) -33- CASTLE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS) RECLASSIFICATIONS Certain reclassifications have been made to make the periods presented comparable. USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. NEW ACCOUNTING PRONOUNCEMENTS On September 28, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 106 ("SAB No. 106"). SAB No. 106 applies to companies using the full cost method of accounting for oil and gas properties and equipment costs, such as the Company. SAB No. 106 affects the way in which the Company calculates its full cost ceiling limitation (the Company now excludes future cash outflows associated with settling asset retirement obligations that are accrued on the balance sheet related to proved developed properties in the calculation of the ceiling) and the way the Company calculates depletion on its proved undeveloped gas properties. The Company adopted SAB No. 106 on October 1, 2004. The effects of adoption of SAB No. 106 to date have been immaterial. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement. Pursuant to a delay in the implementation date by the SEC, SFAS No. 123(R) will be effective for the Company beginning October 1, 2005. The Company does not expect SFAS No. 123(R) to have any impact on its results of operations. The Company has not issued any stock options since January 2002 and all stock options issued were vested by July 31, 2002. In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154 "). SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of FAS 154 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. In March 2005, the FASB issued FASB Interpretation 47 ("FIN 47 "), an interpretation of SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143 "). FIN 47 clarifies the term "conditional asset retirement obligation" as it is used in SFAS No. 143. The Company expects to apply the guidance of FIN 47 commencing October 1, 2005 and expects no impact on its financial statements. -34- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 3 - DISCONTINUED REFINING OPERATIONS Effective September 30, 1995, the Company's refining subsidiaries discontinued their refining operations. An analysis of the assets and liabilities related to the refining segment for the period October 1, 2002 to September 30, 2005 is as follows: NET REFINING LIABILITIES (ASSETS) RETAINED ----------------- Balance - October 1, 2002.................................. $3,016 Adjustment of liabilities.................................. (151) Cash transactions.......................................... (461) ------ Balance - September 30, 2003 and 2004...................... 2,404 Cash transactions.......................................... (1,551) Chevron settlement......................................... 4,897 ------ Balance - September 30, 2005............................... $5,750 ====== As of September 30, 2005, the estimated value of net refining liabilities (assets) retained consisted of a litigation settlement payable of $5,750. The litigation settlement was paid by the Company on October 26, 2005. Most of the cash transfers involve the payment of legal and other expenses related to the Chevron litigation. "Net refining liabilities (assets) retained is based on the transactions consummated by the Company with American Western and transactions consummated by American Western and IRLP subsequently with others and the Company's litigation with Chevron (see below). Chevron Litigation On September 20, 2005, the Company settled its long-standing litigation with Chevron. In exchange for a payment by the Company of $5,750, the Company negotiated a settlement agreement which provided mutual releases and a complete and comprehensive indemnification by Texaco Inc. of the Company, related entities and persons against losses or liabilities arising out of or related to the now dismantled Indian Refinery and related properties. Chevron had filed the lawsuit against the Company and two of its inactive subsidiaries in August 2002, seeking damages and declaratory relief under contractual and statutory claims arising from environmental contamination at the Indian Refinery. A now inactive subsidiary of the Company had operated that refinery for approximately five years subsequent to approximately 75 years of operation by Chevron. The lawsuit claimed that the Company was contractually obligated to indemnify and defend Chevron against all liability and costs, including lawsuits, claims and administrative actions initiated by the United States Environmental Protection Agency ("EPA") and others that Chevron had incurred or might incur as a result of environmental contamination at and around the Indian Refinery, even if that environmental contamination had been caused by Chevron. The suit also sought costs, damages and declaratory relief against the Company under the Federal Comprehensive Environmental Response Compensation Liability Act ("CERCLA"), the Oil Pollution Act of 1990 ("OPA") and the Solid Waste Disposal Act, as amended, ("RCRA"). Chevron had also tendered to the Company the defense of certain third party claims against Chevron in Illinois state court. The Company disputed and contested the claims made by Chevron and denied all liability. -35- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) All claims in this litigation, as well as any other claims tendered by Chevron, have been resolved by the settlement and the litigation was dismissed with prejudice on October 12, 2005. The Company accrued the $5,750 settlement at September 30, 2005 which it paid on October 26, 2005. NOTE 4 - ACQUISITIONS AND DISPOSITIONS Acquisitions On March 31, 2004, the Company acquired interests in 138 western Pennsylvania gas wells from Delta. The Company previously owned most of these properties through May 31, 2002 when it sold all of its United States oil and gas properties to Delta. The purchase price paid by the Company was $8,000. The effective date of the purchase was January 1, 2004. For accounting purposes the Company allocated $43 of the purchase price to trucks and the remainder to gas properties. The Company owned approximately 25% of Delta (see Note 10) at the time of purchase and three of the Company's directors were also directors of Delta. Prior to approving the purchase, the Company appointed a committee of independent directors to evaluate and make a recommendation to the Board of Directors with respect to the proposed transaction. The Committee engaged an outside consultant to evaluate the fairness of the proposed purchase. Based upon that consultant's recommendation that the purchase price was reasonable and fair and the favorable recommendation of the committee, the full Board of Directors of the Company unanimously approved the transaction. At the same time the Company also purchased another owner's interests in the same gas properties for $334 subject to similar final closing adjustments. The other owner's interests in the properties were approximately four percent of Delta's interests in the same properties. On March 30, 2004, the Company acquired interests in 28 western Pennsylvania gas wells for $1,100 from five limited partnerships. That transaction closed March 30, 2004. The President of the general partner of the five selling limited partnerships was and still is an officer and director of the Company. As a result, the Company appointed a committee of independent directors to evaluate and make recommendations to the Board with respect to the proposed transaction. That committee engaged an outside consultant to evaluate the fairness of the proposed purchase. Based upon that consultant's opinion that the proposed purchase price was reasonable and fair and the favorable recommendation of the committee, the full Board of Directors of the Company unanimously approved the transaction. The final adjusted purchase price for all of the gas properties acquired in March 2004 was $8,985. The Company's petroleum reservoir engineer estimated the proved reserves applicable to the three Pennsylvania purchases to be approximately eight billion cubic feet of natural gas, of which approximately 87% represents proved producing reserves, while the remaining 13% represents behind pipe and undeveloped reserves. Approximately 130 of 166 wells in which the Company acquired interests are operated by the Company. The Company also entered into an operations management agreement with Delta whereby Delta agreed to perform certain well operations functions for the Company on a transitional basis for up to six months commencing April 1, 2004. That agreement terminated September 30, 2004 and the Company commenced and is now performing the well operations functions previously performed by Delta. -36- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 5 - RESTRICTED CASH Restricted cash consists of the following:
SEPTEMBER 30, ---------------------- 2005 2004 ---- ---- Certificates of deposit supporting operating bonds ..................... $110 $120 Deposit securing contingent promissory note in Dominion litigation, plus accrued interest..................................... 788 ---- ---- $898 $120 ==== ====
The certificates of deposit support letters of credit for operating and drilling bonds provided to state or county regulatory agencies. The deposit securing the contingent promissory note in the Dominion litigation is payable only if there is a final judgment against the Company. (See Note 15) NOTE 6 - MARKETABLE SECURITIES The Company's investment in marketable securities was as follows:
SEPTEMBER 30, 2005 ------------------------- DELTA SEPTEMBER 30, 2004 PETROLEUM ------------------- CHEVRON CORPORATION CHEVRON TOTAL ------- ----------- ------- ----- Common shares owned.................................. 354 6,700,000 354 354 === ========= === === Cost................................................. $15 $ 39,892 $15 $15 Unrealized gain (loss)............................... 8 99,468 4 4 --- --------- --- --- Book (market) value.................................. $23 $ 139,360 $19 $19 === ========= === ===
Through March 31, 2005, the Company accounted for its investment in Delta using the equity method. Commencing April 1, 2005, the Company accounted for its investment in Delta as available-for-sale marketable securities (see Notes 2 and 10). -37- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 7 - ACCOUNTS RECEIVABLE Accounts receivable consists of the following:
SEPTEMBER 30, ------------------------- 2005 2004 ---------- ---------- Gas production revenues................................................................ $506 $495 Purchase price adjustments............................................................. 17 Other.................................................................................. 168 70 ---- ---- $674 $582 ==== ==== Account receivable - Delta Petroleum Corporation....................................... $339 ====
Account receivable - Delta Petroleum Corporation consisted of the final purchase price adjustment related to the Company's acquisition of Appalachian gas properties from Delta (see Notes 4 and 10). Delta paid this amount subsequent to September 30, 2004. NOTE 8 - ASSET RETIREMENT OBLIGATIONS Changes in the Company's asset retirement obligations are as follows:
YEAR ENDED SEPTEMBER 30, ------------------------ 2005 2004 ---- ---- Balance - beginning of period...................................................... $230 Acquisitions....................................................................... $222 Adjustments........................................................................ 10 8 Accretion of discount.............................................................. 17 ---- ---- Balance - end of period............................................................ $257 $230 ==== ==== Current portion.................................................................... $ 3 $ 3 Long-term portion.................................................................. 254 227 ---- ---- $257 $230 ==== ====
NOTE 9 - INVESTMENT IN NETWORKED ENERGY LLC AND NOTE RECEIVABLE DUE FROM NETWORKED ENERGY LLC The Company accounts for its investment in Network using the equity method of accounting (see Note 2). In fiscal 2002 the Company invested an additional $150 in Network increasing its ownership from 35% to 45%. In addition, the Company loaned Network $125 in fiscal 2003. The Company recorded a $354 impairment provision on its investment in Network's equity and a $126 allowance for doubtful accounts on its note receivable from Network at March 31, 2003 because Network had not obtained any contracts for the services its offers. These impairment provisions reduced the book value of the Company's investment in Network to zero and the Company no longer recorded any portion of Network's losses after March 31, 2003. For the period from April 1, 2003 to September 30, 2003, Network recorded a loss of $13, no portion of which was recorded by the Company. For the period from October 1, 2003 to September 30, 2004, Network recorded a loss of $4, no portion of which was recorded by the Company. For the period from October 1, 2004 - September 30, 2005, Network recorded income of $29. As a result, the Company recorded 45% of Network's cumulative net income since April 1, 2003, which aggregated $12. The Company's investment in Network as of September 30, 2005 and 2004 was as follows: -38- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
NOTE INVESTMENT RECEIVABLE ---------- ---------- Investment in Network's equity........................................................ $650 Note receivable - Network............................................................. $125 Accumulated amortization of goodwill.................................................. (23) Accumulated share of Network's losses................................................. (273) Impairment provision.................................................................. (354) Accrued interest receivable........................................................... 1 Allowance for doubtful account........................................................ (126) ---- ---- Balance - September 30, 2004.......................................................... - - Share of Network's cumulative income(loss) since April 1, 2003........................ 5 ---- ---- Balance - September 30, 2005.......................................................... $ 5 - ==== ====
Network's membership units are held by the Company and one other member who owns 55% of Network. The membership interests are not publicly traded. See Notes 1 and 2. NOTE 10 - INVESTMENT IN DELTA PETROLEUM CORPORATION (EQUITY METHOD) Changes in the Company's investment in Delta were as follows:
Investment - October 1, 2003...................................................................... $29,477 Share of Delta's income (losses).................................................................. 1,352 Share of Delta's other comprehensive income (loss)................................................ (92) Tax effect on share of Delta's other comprehensive income (loss).................................. 32 Issuance of additional Delta shares to outsiders at a price different than the Company's book value.......................................................................................... 20,054 Sale of Delta shares to outsiders................................................................. (11,128) Other............................................................................................. 3 ------- Investment - September 30, 2004................................................................... 39,698 Share of Delta's income (losses), October 1, 2004 to March 31, 2005............................... 1,690 Share of Delta's other comprehensive income (loss) and sale of additional Delta shares to outsiders October 1, 2004 to March 31, 2005................................................. 238 Sale of 300,000 Delta shares to third party in March 2005........................................ (1,734) Reclassification to marketable securities, March 31, 2005......................................... (39,892) ------- Investment - April 1, 2005 and September 30, 2005................................................. 0 =======
Through March 31, 2005, the Company accounted for its investment in Delta using the equity method. Initially, in May 2002, the Company had owned 44% of Delta and three of the Company's directors constituted three of seven Delta directors. By March 31, 2005, the Company's ownership of Delta had decreased to 16% (approximately 15% fully diluted) and the Company's directors only comprised two of nine Delta directors. As a result of these developments, the Company believed it no longer had significant influence on Delta's management and thus, effective April 1, 2005, the Company commenced accounting for its investment in Delta as a marketable available-for-sale security. As a result of this change in accounting method, the book value of the Company's investment in Delta and the Company's cumulative equity in Delta's comprehensive income (loss) at April 1, 2005, under the equity method of accounting, $39,892, became the Company's value of the Delta stock as a marketable security on April 1, 2005. -39- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) The difference between the Company's investment in Delta and its proportional share of Delta's equity was approximately $4,000 at September 30, 2004. The Company has allocated the excess to Delta's ownership interests in offshore California leases and the related potential legal recovery from Delta's offshore California oil and gas leases. In March 2005, the Company sold 300,000 shares of Delta for net proceeds of $4,800 and recognized a gain of $3,066 on the sale. The book value of the shares sold was based upon the book value per share of the Company's investment in Delta, computed using the equity method, on the day of the sale. In March and May 2004, the Company sold 2,948,289 shares of Delta for net proceeds of $29,339 and recognized a gain on the sale of $18,211. The book values of the shares sold was based upon the book value per share of the Company's investment in Delta on the day of the sale. At September 30, 2005, the Company owned approximately 14% of Delta and one of the Company's directors was also a director of Delta, which currently has nine directors. See Notes 2 and 6. Condensed financial information concerning Delta is as follows:
SEPTEMBER 30, 2004 ------------- CONDENSED BALANCE SHEETS Assets Current assets .................................................................................. $ 15,896 Property and equipment, net...................................................................... 261,907 Other assets..................................................................................... 1,330 --------- $ 279,133 ========= Liabilities and Stockholders' Equity Current liabilities, including current portion of long-term debt................................. $ 15,177 Long-term liabilities and minority interests..................................................... 63,445 Shareholder's equity............................................................................. 200,511 --------- $ 279,133 =========
-40- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, ---------------------------- 2004 2003 ------------- ------------ (Unaudited) CONDENSED STATEMENTS OF OPERATIONS Revenue: Oil and gas sales............................................................... $49,387 $27,850 Other........................................................................... (428) (2,074) ------- ------- 48,959 25,776 ------- ------- Expense: Lease operating expenses........................................................ 11,865 9,579 General and administrative...................................................... 9,514 5,368 Depreciation, depletion and amortization........................................ 13,344 5,797 Other........................................................................... 7,920 800 ------- ------- 42,643 21,544 ------- ------- Other income (loss)............................................................... (1,849) (1,728) ------- ------- Income (loss) before taxes........................................................ 4,467 2,504 Income taxes...................................................................... Discontinued operations, net of tax............................................... 3,169 ------- ------- Net income (loss)................................................................. $ 7,636 $ 2,504 ======= =======
The above condensed financial information has been compiled using Delta's audited financial statements for the years ended June 30, 2004 and 2003 and its unaudited quarterly financial statements for the quarters ended September 30, 2002, 2003 and 2004. NOTE 11 - FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are as follows:
SEPTEMBER 30, --------------------------- 2005 2004 ---------- ---------- Cost: Furniture and fixtures and software............................................ $ 705 $ 690 Automobiles and trucks ........................................................ 461 349 ------- ------- 1,166 1,039 Accumulated depreciation......................................................... (978) (928) ------- ------- $ 188 $ 111 ======= =======
NOTE 12 - OIL AND GAS PROPERTIES (UNAUDITED) Oil and gas properties consist of the following:
SEPTEMBER 30, --------------------------- 2005 2004 ---------- ---------- Proved properties..................................................................... $9,217 $9,207 Less: accumulated depreciation, depletion and amortization............................ (653) (195) ------ ------ $8,564 $9,012 ====== ======
-41- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) As required by SFAS No. 69 "Disclosure About Oil and Gas Producing Activities," the Company has also presented information concerning its interest in Delta's oil and gas operations. The Company's 17.8% interest in Delta's net capitalized costs at September 30, 2004 was $46,619 (unaudited). Capital costs incurred by the Company in oil and gas activities are as follows:
YEAR ENDED SEPTEMBER 30, ------------------------ 2005 2004 ------ ------ UNITED UNITED STATES STATES ------ ------ Acquisition of properties: Proved properties......................................................... $8,985 Unproved properties Exploration................................................................... Development................................................................... ------- ------ $8,985 ======= ======
No capital costs were incurred by the Company in oil and gas activities for the year ended September 30, 2003. The Company's interest in Delta's costs of property acquisition, exploration and development are as follows:
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2004 2003 -------------------------------- -------------------------------- ONSHORE OFFSHORE TOTAL ONSHORE OFFSHORE TOTAL -------- -------- ------- ------- -------- ------ Acquisition of properties: Proved properties .............. $22,888 $22,888 $4,421 $4,421 Unproved properties ............ 6,626 $121 6,747 285 $181 466 Exploration........................ 428 428 58 58 Development........................ 4,410 190 4,600 2,112 404 2,516 ------- ---- ------- ------ ---- ------ $34,352 $311 $34,663 $6,876 $585 $7,461 ======= ==== ======= ====== ==== ====== Company's interest in Delta........ 17.8% 41% ==== ==
All of Delta's offshore properties are located in offshore California. The Company's interest in Delta's property acquisition, exploration and development costs incurred in oil and gas activities is presented for annual periods ending June 30 because this is Delta's fiscal year end. -42- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) Results of operations, excluding corporate overhead and interest expense, from the Company's oil and gas producing activities are as follows:
YEAR ENDED SEPTEMBER 30, ------------------------ 2005 2004 ---------- ----------- Revenues: Crude oil, condensate, natural gas liquids and natural gas sales.................... $2,561 $1,087 ------ ------ Costs and expenses: Production costs.................................................................. $ 584 $ 315 Depreciation, depletion and amortization.......................................... 457 195 ------ ------ Total costs and expenses.......................................................... 1,041 510 ------ ------ Income tax provision (benefit)...................................................... 547 99 ------ ------ Income (loss) from oil and gas producing activities................................. $ 973 $ 478 ====== ======
The income tax provisions were computed at the effective tax rate for continuous operations for the related fiscal year. The Company had no oil and gas producing activities for the year ended September 30, 2003. The Company's 17.8% interest in Delta's historical results of operations, excluding corporate overhead and interest expense, from oil and gas producing activities are as follows:
YEAR ENDED JUNE 30, --------------------- 2004 2003 --------- ---------- Income (loss) from oil and gas producing activities, including $982 of income from discontinued operations and gains from properties sold in 2004.......... $3,339 $4,241 ====== ====== The Company's interest in Delta........................................................ 17.8% 41% ====== ======
The Company's interest in Delta's historical results of operations is presented for annual periods ended June 30 because this is Delta's fiscal year end. Assuming conversion of oil and gas production into common equivalent units of measure on the basis of energy content, depletion rates per equivalent MCF (thousand cubic feet) of natural gas were as follows:
YEAR ENDED SEPTEMBER 30, -------------------------- 2005 2004 ---------- ---------- Depletion rate per equivalent MCF of natural gas....................................... $1.19 $1.25 ===== =====
No depletion expense was incurred for the fiscal year ended September 30, 2003 because the Company did not directly own any oil and gas properties in fiscal 2003. Under the full cost method of accounting, the net book value of oil and gas properties less related deferred income taxes (the "costs to be recovered") may not exceed a calculated "full cost ceiling." The ceiling limitation is the discounted estimated after-tax future net revenues from oil and gas properties. The ceiling is imposed separately by country. In calculating future net revenues, current prices and costs are generally held constant indefinitely. The costs to be recovered are compared to the ceiling on a quarterly basis. If the costs to be recovered exceed the ceiling, the excess is written off as an expense, except as discussed in the following paragraph. -43- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) If, subsequent to the end of the reporting period, but prior to the applicable financial statements being published, prices increase to levels such that the ceiling would exceed the costs to be recovered, a write-down otherwise indicated at the end of the reporting period is not required to be reported. A write-down indicated at the end of a reporting period is also not required if the value of additional reserves proved up on properties after the end of the reporting period, but prior to the publishing of the financial statements, would result in the ceiling exceeding the costs to be recovered, as long as the properties were owned at the end of the reporting period. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. At September 30, 2005 and 2004, based upon natural gas prices at September 30, 2005 and 2004, the ceiling value of the Company's reserves exceeded the Company's costs to be recovered and no full cost ceiling write-down was required. NOTE 13 - PROVED OIL AND GAS RESERVES AND RESERVE VALUATION (UNAUDITED) Reserve estimates are based upon subjective engineering judgments made by the Company's independent petroleum reservoir engineers, Ralph E. Davis Associates, Inc. and may be affected by the limitations inherent in such estimations. The process of estimating reserves is subject to continuous revisions as additional information is made available through drilling, testing, reservoir studies and production history. There can be no assurance such estimates will not be materially revised in subsequent periods. Estimated quantities of proved reserves and changes therein, all of which are domestic reserves, are summarized below:
("000'S" OMITTED) -------------------------------------- OIL (BBLS) NATURAL GAS (MCF) ---------- ----------------- Proved developed and undeveloped reserves: As of October 1, 2002 and 2003................................ Acquisitions.............................................. 9,041 Production................................................ (156) ------ As of September 30, 2004...................................... 8,885 Production................................................ (385) Revision of previous estimates............................ (84) ------ As of September 30, 2005 8,416 ====== Proved developed reserves: September 30, 2002 and 2003................................... ====== September 30, 2004............................................ 8,081 ====== September 30, 2005............................................ 7,792 ====== Company's 17.8% interest in reserves of Delta (proved developed and undeveloped reserves): June 30, 2004............................................... 2,350 15,749 ===== ======
The Company did not own any oil and gas properties at September 30, 2002 or September 30, 2003. -44- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) Delta's fiscal year is June 30th and reserve information with respect to the Company's share of Delta's reserves is therefore presented as of that date. The following is a standardized measure of discounted future net cash flows and changes therein relating to estimated proved oil and gas reserves, as prescribed in SFAS No. 69. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas properties. An estimate of fair value would also take into account, among other factors, the likelihood of future recoveries of oil and gas in excess of proved reserves, anticipated future changes in prices of oil and gas and related development and production costs, a discount factor based on market interest rates in effect at the date of valuation and the risks inherent in reserve estimates:
SEPTEMBER 30, ------------------------- 2005 2004 ---------- ---------- Future cash inflows ................................................................ $129,204 $53,961 Future production costs ............................................................ (27,260) (12,116) Future development costs ........................................................... (1,379) (1,479) Future income tax expense .......................................................... (28,535) (10,563) -------- ------- Future net cash flows .............................................................. 72,030 29,803 Discount factor of 10% for estimated timing of future cash flows ................... (38,845) (16,660) -------- ------- Standardized measure of discounted future cash flows ............................... $ 33,185 $13,143 ======== =======
The future cash flows were computed using the applicable year-end prices and costs that related to then existing proved oil and gas reserves in which the Company has interests. The estimates of future income tax expense were computed at the blended rate (Federal and state combined) of 36%, taking into account the Company's tax carryforwards. (See Note 19) No standardized measure of discounted future cash flows existed at September 30, 2003 because the Company owned no oil and gas properties directly on this date. The following were the sources of changes in the standardized measure of discounted future net cash flows:
SEPTEMBER 30, ---------------------------- 2005 2004 ---------- ---------- Standardized measure, beginning of year ............................................ $13,143 Sale of oil and gas, net of production costs ....................................... (1,977) ($ 772) Net changes in prices .............................................................. 26,221 Decrease in development costs ...................................................... (33) Purchase of reserves in place ...................................................... 17,802 Net changes in income taxes......................................................... (6,081) (3,887) Accretion of discount............................................................... 1,314 Other............................................................................... 598 ------- ------- Standardized measure, end of year................................................... $33,185 $13,143 ======= =======
No presentation of changes in the standardized measure of discounted future net cash flows was prepared for the year ended September 30, 2003 because the Company had disposed of all of its oil and gas properties by May of 2002 and did not reacquire oil and gas properties until March of 2004. -45- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) The Company's interests in Delta's standardized measure of discounted future cash flows are as follows:
JUNE 30, ----------------------- 2004 2003 ---------- ---------- $51,271 $43,957 ======= ======= Company's ownership interest........................................................... 17.8% 41% ==== ==
The Company's share of Delta's standardized measure of discounted future cash flow was computed as of June 30 because this is Delta's fiscal year end. NOTE 14 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share.
YEAR ENDED SEPTEMBER 30, ------------------------------------------- 2005 2004 2003 ---------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share - net income (loss) available to common stockholders............................. ($ 1,591) $ 13,620 ($ 2,001) ========== ========== ========== Denominator: Denominator for basic earnings per share-weighted average shares outstanding......................................................... 7,052,693 6,675,538 6,592,884 Effective of dilutive stock options.................................... 258,444 ---------- --------- ---------- Denominator for diluted earnings per common share...................... 7,052,693 6,933,982 6,592,884 ---------- --------- ---------- Basic net income (loss) per common share............................... ($ .23) $ 2.04 ($ .30) ========== ========= ========== Diluted net income (loss) per common share............................. ($ .23) $ 1.96 ($ .30) ========== ========= ==========
The following options that could be potentially dilutive were not included in the computation of diluted net income (loss) per share because the effect would have been anti-dilutive for the periods indicated:
YEAR ENDED SEPTEMBER 30, --------------------------------------------- 2005 2004 2003 ------------ ------------ ------------ Number of options........................................................ 90,000 712,500 Price range of options................................................... $3.79-$8.58 $3.71-$8.58
NOTE 15 - COMMITMENTS, CONTINGENCIES AND LINE OF CREDIT OPERATING LEASE COMMITMENTS The Company has the following noncancellable operating lease commitments and noncancellable sublease rentals at September 30, 2005: -46- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
LEASE SUBLEASE NET LEASE YEAR ENDING SEPTEMBER 30, COMMITMENTS COMMITMENTS COMMITMENTS ------------------------- ----------- ----------- ----------- 2006.................................... $184 ($21) $163 2007.................................... 180 (21) 159 2008.................................... 177 (21) 156 2009.................................... 120 (21) 99 2110.................................... 93 (21) 72 2111.................................... 14 (3) 11 ---- ----- ---- Total................................... $768 ($108) $660 ==== ===== ====
Rent expense for the years ended September 30, 2005, 2004 and 2003 was $311, $339 and $449, respectively. SEVERANCE/RETENTION OBLIGATIONS At September 30, 2005, the Company had severance agreements with one officer and four employees. The severance agreements provide severance payments if the Company sells its assets, the officer/employee is terminated and the new purchaser does not offer the officer/employee employment at a compensation level of at least 80% of the officer's/employee's current compensation level. Severance obligations at September 30, 2005 were as follows: Officer............................................. $ 73 Employees........................................... 118 ----- $ 191 ===== LEGAL PROCEEDINGS CONTINGENT ENVIRONMENTAL LIABILITIES See Note 3. OTHER LITIGATION Long Trusts Lawsuit In November 2000, the Company and three of its subsidiaries were defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case, the Long Trusts, are non-operating working interest owners in certain wells previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an inactive exploration and production subsidiary of the Company. The wells were among those sold to UPRC in May 1997. The Long Trusts claimed that CTPLP did not allow them to sell gas from March 1, 1996 to January 31, 1997 as required by applicable joint operating agreements, and they sued CTPLP and the Company's other subsidiaries, claiming (among other things) breach of contract, breach of fiduciary duty, conversion and conspiracy. The Long Trusts sought actual damages, exemplary damages, prejudgment and post-judgment interest, attorney's fees and court costs. CTPLP counterclaimed for approximately $150 of unpaid joint interest billings plus interest, attorney's fees and court costs. After a three-week trial, the District Court in Rusk County submitted 36 questions to the jury which covered the claims and counterclaim in the lawsuit. Based upon the jury's answers, the District Court entered judgment on some of the Long Trusts' claims against the Company and its subsidiaries, as well as CTPLP's counterclaim against the Long Trusts. The District Court issued an amended judgment on September 5, 2001 which became final December 19, 2001. The net amount awarded to the plaintiffs was approximately $2,700. -47- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) The Company and its subsidiaries and the Long Trusts subsequently filed notices of appeal, submitted legal briefs in April 2002, reply briefs in June and July 2002, and ultimately argued the case before the 12th Court of Appeals in Tyler, Texas in October 2002. On July 31, 2003, that court reversed and remanded in part the trial court's judgment against the Company and its subsidiaries while affirming the judgment against the Long Trusts which had awarded damages on the counterclaim asserted by CTPLP. In its decision, the appellate court held that the trial court had submitted erroneous theories to the jury, expressly rejecting the Long Trusts' claims for breach of fiduciary duty, conversion, implied covenants and exemplary damages. It also remanded the Long Trusts' claims for breach of contract to the district court for retrial. The appellate court upheld the trial court's award to CTPLP on its counterclaim for approximately $150 of unpaid joint interests billings, $450 in attorneys' fees, plus interest and court costs. Both the Company and its subsidiaries and the Long Trusts thereafter submitted motions for a rehearing on certain rulings to the 12th Court of Appeals. That court denied both motions for a rehearing. The Long Trusts subsequently filed a petition for review with the Supreme Court of Texas. On March 26, 2004, the Texas Supreme Court denied the Long Trusts petition for review and the Long Trusts filed a petition for rehearing with that court two weeks later. That petition was also subsequently denied, whereupon the Court of Appeals issued its mandate on June 9, 2004 completing the appellate process. The supersedeas bond posted by the Company was released, along with a $4,110 letter of credit, including accrued interest, that secured the bond. Certain breach of contract claims by the Long Trusts which were reversed and remanded by the appellate court may be retried by the plaintiffs. Based on the evidence at the initial trial coupled with the guidance to the trial court given in the appellate decision, the Company believes that it will be able to prove that there was no breach of contract and that Long Trusts suffered no damages, and that any such breach of contract claims, even if decided adversely to the Company, will not result in a material loss to the Company. Pursuant to the mandate of the Texas Court of Appeals, the Company moved to sever CTPLP's claims against the Long Trusts from any retrial of the Long Trust's contract claims against the Company and to collect on CTPLP's judgment against the Long Trusts which is secured by a letter of credit posted by the Long Trusts with the trial court. On September 17, 2004, the Long Trusts filed a Motion for Clarification with the Court of Appeals which in essence sought to reverse that court's severance of CTPLP's claims from the retrial of the Long Trusts' breach of contract claims. The Company filed a Petition for Writ of Mandamus with the Court of Appeals on December 3, 2004, requesting that the trial court be stayed from proceeding further, and be ordered to comply with the June mandate of the Court of Appeals. On January 31, 2005, the Court of Appeals stayed the trial court from proceeding and subsequently denied the Motion for Clarification on March 3, 2005 and the Petition for Writ of Mandamus on March 16, 2005. On May 2, 2005, the trial court from the bench announced that CTPLP's severed claim would be assigned a new case number, but took all other requests for action from the parties under advisement. In August 2005, the Company filed a second Petition for Writ of Mandamus with the Court of Appeals requesting that the calculation of interest due from the Long Trusts be made without a new trial and that Long Trusts be ordered to pay the judgment against it plus interest without delay. The Company estimates the judgment to be $1,046, including accrued interest, as of September 30, 2005. The Company has not accrued any recoveries for this litigation as of September 30, 2005, but will record recoveries if and when they are ultimately realized (collected). -48- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) Pilgreen Litigation As part of the oil and gas properties acquired from AmBrit Energy Corporation ("AmBrit") in June 1999, Castle Exploration Company, Inc., a wholly-owned subsidiary of the Company ("CECI") acquired a 10.65% overriding royalty interest ("ORRI") in the Simpson lease in south Texas, including the Pilgreen #2ST gas well. CECI subsequently transferred that interest to Castle Texas Oil and Gas Limited Partnership ("CTOGLP"), an indirect wholly-owned subsidiary. Because the operator suspended revenue attributable to the ORRI from first production due to title disputes, AmBrit, the previous owner, filed claims against the operator of the Pilgreen well, and CTOGLP acquired rights in that litigation with respect to the period after January 1, 1999. In August 2002, $282 was released to the Company of which $249 was recorded as income by the Company and the remaining $33 paid to Delta. Because of a claim by Dominion Oklahoma Texas Exploration and Production, Inc. ("Dominion") (see below), a working interest owner in the same well, that CTOGLP's ORRI in the Simpson lease should be deemed burdened by 3.55% overriding royalty interest, there is still a title dispute as to approximately $120 of suspended CTOGLP Pilgreen #2ST production proceeds for the Company's account. (The Company sold all of its oil and gas assets, including the Pilgreen #2ST well, to Delta on May 31, 2002 but effective as of October 1, 2001.) The Company has named Dominion as a defendant in a legal action seeking a declaratory judgment that the Company is entitled to its full 10.65% overriding royalty interest in the Pilgreen well. The Company believes that Dominion's title exception to CTOGLP's overriding royalty interest is erroneous and notes that several previous title opinions have confirmed the validity of CTOGLP's interest. The litigation is related to the Dominion litigation (see below). The Company and its counsel are currently reviewing the effect of the Court of Appeals' opinion issued in the Dominion litigation on the Company's claims in this litigation. Since the Company has not recorded any revenue related to the $120 of suspended revenue, it expects to record $120 of revenue if and when such revenue is realized (collected), but no expense if it fails in this litigation. Christiansen Litigation CTOGLP, along with several unrelated parties, has also filed suit to collect production proceeds from an additional well on the Simpson lease in which CTOLGP had a 5.325% ORRI suspended by the operator because of title disputes. The Company intends to contest this matter vigorously. At the present time, the amount held in escrow applicable to the additional well attributable to the Company's interest is approximately $66 although approximately $22 of that amount would be subject to Dominion's claims in the Pilgreen Litigation. The Company has not recorded any of the net $44 of suspended revenue as income, but will record it as income when and if it is realized (collected). There is no claim or contingent liability against the Company or its subsidiaries in this matter, just a contingent gain if CTOGLP were to prevail. Dominion Litigation On March 18, 2002, Dominion, operator of the Mitchell and Migl-Mitchell wells in the Southwest Speaks field in south Texas and a working interest owner in the Pilgreen #2ST well, filed suit in Texas against CTOGLP seeking declaratory judgment in a title action that the ORRI held by CTOGLP in these wells should be deemed to be burdened by certain other ORRI's aggregating 3.55% and should therefore be reduced from 10.65% to 7.10%. Dominion is also seeking an accounting and refund of payments for overriding royalty to CTOGLP in excess of the 7.10% since April 2000. The Company currently estimates the amount in controversy to be approximately $783. Dominion threatened to suspend all revenue payable to the Company from the Mitchell and Migl-Mitchell to offset its claim. The Company and Dominion subsequently examined the land and lease documents concerning the ORRI's. The Company believes that Dominion's title exception to CTOGLP's ORRI is erroneous and notes that several previous title opinions have confirmed the validity of CTOGLP's interest. In July 2003, Dominion filed a motion for partial summary judgment concerning the Company's claim that it had assumed the liabilities of its predecessor in interest and CTOGLP filed its response to Dominion's motion as well as its own cross motion for partial summary judgment. In September 2003, the District Court of Lavaca County granted Dominion's partial motion for partial summary judgment. In January 2004, Dominion filed a motion for final summary judgment on this matter to which CTOGLP and the other defendants filed a response. In May 2004, the District Court of Lavaca County granted Dominion's motion for final summary judgment following which the Company's appealed both of the District Court's summary judgments to the Court of Appeals in Corpus Christi. -49- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) By agreement with Dominion, CTOGLP executed a promissory note for $783 guaranteed by the Company and deposited this amount in a separate restricted cash account of CTOGLP to support the note and to avoid the cost of a supersedeas bond. On July 28, 2005, the Court of Appeals issued a Memorandum Opinion that affirmed Dominion's claims to reduce the ORRI, but only to take effect at a date after CTOGLP had sold the ORRI. The Court of Appeals overturned that portion of the judgment that required CTOGLP to refund any money received by it. The Company does not at this time know if Dominion intends to petition the Supreme Court of Texas for review of this decision. The promissory note issued by CTOGLP will be cancelled and the restricted cash account of CTOGLP released when and if this judgment becomes final and non-appealable. In fiscal 2004, the Company recorded an $825 loss provision related to the Dominion litigation - primarily as a result of the District Court's granting of Dominion's motion for summary judgment in May 2004. The Company has reversed that provision plus $20 of accrued interest on the contingent note during fiscal 2005 primarily because the Court of Appeals reversed that District Court judgment against the Company. Nevertheless, Company's contingent note payable to Dominion and CTOGLP's restricted cash account are required to remain in place until the Appeals Court judgment becomes non-appealable. Dominion filed a petition for appeal to the Texas Supreme Court of the appellate court's decision. If the Supreme Court reverses the Appeals Court decision, the Company would then become liable for the contingent note to Dominion plus interest or some portion thereof. In such case, the Company would again record a loss provision. CONTINGENT GAIN GAMXX 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 and received a $24,000 mortgage on the GAMXX property, an idle refining plant in Theodore, Alabama. When GAMXX was unable to obtain financing, the Company recorded a one hundred percent loss provision on its loans to GAMXX in 1991 and 1992 while still retaining its lender's lien against GAMXX. The Company subsequently filed and currently maintains a $10,000 lien on the GAMXX properties. In September 2005, the Company entered into an agreement to sell its lender's interest in GAMXX to an outside party for $3,500 in January 2006. The agreement provides that the purchaser is responsible for unpaid property taxes (approximately $1000 at September 30, 2005) on the property as well as for any environmental remediation that is required. The purchaser made a non-refundable deposit of $10 upon executing the agreement. If the purchaser completes the purchase of the Company's interest in GAMXX, the Company expects that it will receive net proceeds of approximately $3,200 after allowance for broker commissions and legal fees. If the purchaser does not ultimately purchase the Company's interest, the Company will simply retain the $10 deposit. In September 2005, another third party purchased the tax lien on the property by paying the unpaid property taxes of $1,000. As a result, the Company or any purchaser of its interest has a year from the date of the purchase of the tax lien to redeem the tax lien by paying the tax lien purchaser $1,000 plus interest. If the tax lien is not redeemed in that one-year period, the property will be owned by the purchaser of the tax lien and the Company's mortgage and lien on the property will be terminated. The Company has carried its loans to GAMXX at zero for the last ten years. The Company will record any proceeds as "other income" if and when it collects such amount. -50- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 16 - EMPLOYEE BENEFIT PLAN 401(K) PLAN On October 1, 1995, the Company adopted a 401(k) plan (the "Plan") for its employees and those of its subsidiaries. All employees are eligible to participate. Employees participating in the Plan can authorize the Company to contribute up to 15% of their gross compensation to the Plan. The Company matches such voluntary employee contributions up to 3% of employee gross compensation. Employees' contributions to the Plan cannot exceed thresholds set by the Secretary of the Treasury. Vesting of Company contributions is immediate. During the years ended September 30, 2005, 2004 and 2003, the Company's contributions to the Plan aggregated $23, $13, and $18, respectively. POST-RETIREMENT BENEFITS Neither the Company nor its subsidiaries provide any other post-retirement plans for employees. NOTE 17 - STOCKHOLDERS' EQUITY From November 1996 until September 30, 2003, the Company's Board of Directors authorized the Company to purchase up to 5,267,966 of its outstanding shares of common stock on the open market. As of September 30, 2005, 4,911,044 shares had been repurchased or surrendered to the Company at a cost of $66,667. The repurchased shares are held in treasury. On June 30, 1997, the Company's Board of Directors approved a dividend policy of $.20 per share per year, payable quarterly. The dividend policy remains in effect until rescinded or changed by the Board of Directors. Quarterly dividends of $.05 per share have subsequently been paid for all quarters except for the quarter ending June 30, 2002. In addition, the Company paid a special dividend of $1.00 per share during the quarter ended June 30, 2005. NOTE 18 - STOCK OPTIONS AND WARRANTS Option and warrant activities during each of the three years ended September 30, 2005 are as follows (in whole units):
INCENTIVE WEIGHTED PLAN OTHER AVERAGE OPTIONS OPTIONS TOTAL PRICE --------- ------- ----- -------- Outstanding at October 1, 2002....................... 750,000 60,000 810,000 $5.29 Expired.............................................. (97,500) (97,500) 4.08 --------- ------- --------- ----- Outstanding at September 30, 2003.................... 652,500 60,000 712,500 5.46 Exercised............................................ (277,500) (277,500) 4.94 --------- ------- --------- ----- Outstanding at September 30, 2004.................... 375,000 60,000 435,000 5.79 Exercised............................................ (300,000) (45,000) (345,000) 5.75 --------- ------- --------- ----- Outstanding - September 30, 2005..................... 75,000 15,000 90,000 $5.93 ========= ======= ========= ===== Exercisable at September 30, 2005.................... 75,000 15,000 90,000 ========= ======= ========= Reserved at September 30, 2005....................... 1,687,500 15,000 1,702,500 ========= ======= ========= Reserved at September 30, 2004....................... 1,687,500 60,000 1,747,500 ========= ======= ========= Reserved at September 30, 2003....................... 1,687,500 60,000 1,747,500 ========= ======= ========= Reserved at September 30, 2002....................... 1,687,500 60,000 1,747,500 ========= ======= =========
-51- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
INCENTIVE WEIGHTED PLAN OTHER AVERAGE OPTIONS OPTIONS TOTAL PRICE --------- ------- ----- -------- Exercise prices at: September 30, 2005...................... $3.71-$8.58 $3.79 September 30, 2004...................... $3.71-$8.58 $3.79 September 30, 2003...................... $3.42-$8.58 $3.79 Exercise Termination Dates.............. 01/02/2008- 4/23/2007 04/23/2007- 01/02/2012 01/02/2012
In fiscal 1993, the Company adopted the 1992 Executive Equity Incentive Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to increase the ownership of common stock of the Company by those non-union key employees (including officers and directors who are officers) and outside directors who contribute to the continued growth, development and financial success of the Company and its subsidiaries, and to attract and retain key employees and reward them for the Company's profitable performance. The Incentive Plan provided that an aggregate of 1,687,500 shares of common stock of the Company will be available for awards in the form of stock options, including incentive stock options and non-qualified stock options generally at prices at or in excess of market prices at the date of grant. The Incentive Plan also provided that each outside director of the Company would annually be granted an option to purchase 15,000 shares of common stock at fair market value on the date of grant. Effective October 1, 2002, the Company's Compensation Committee terminated the annual option grants to outside directors. No options have been granted since January 2002. The Company applies APB 25 in accounting for options and accordingly recognizes no compensation cost for its stock options for grants with an exercise price equal to the current fair market value. At September 30, 2005, exercise prices for outstanding options ranged from $3.71 to $8.58. The weighted average remaining contractual life of such options was 3.9 years. No stock options were issued in fiscal 2003, 2004 or 2005. See Note 24. -52- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 19 - INCOME TAXES Provisions for (benefit of) income taxes consist of:
YEAR ENDED SEPTEMBER 30, ----------------------------- 2005 2004 2003 ---- ---- ---- Provision for (benefit of) income taxes: Current: Federal....................................................... ($ 1) $ 337 State......................................................... (29) Deferred: Federal....................................................... (13) 5,389 ($1,809) State......................................................... (450) 164 (52) Adjustment to the valuation allowance for deferred taxes: Federal....................................................... (3,404) 1,470 State......................................................... (101) 42 ----- ------ ------- ($493) $2,385 ($ 349) ===== ====== =======
The tax provision (benefit) has been allocated as follows:
YEAR ENDED SEPTEMBER 30, ----------------------------- 2005 2004 2003 ---- ---- ---- Continuing operations: State.............................................................. $ 29 $ 63 ($ 10) Federal............................................................ 983 2,322 (339) Discontinued operations: State.............................................................. (42) Federal............................................................ (1,463) ------ ------ ----- ($ 493) $2,385 ($349) ====== ====== =====
Deferred tax assets (liabilities) are comprised of the following:
2005 2004 ---- ---- Litigation provision...................................................... $ 297 Investment in Delta Petroleum Corporation................................. ($43,535) (7,119) Operating losses and tax credit carryforwards............................. 4,219 757 Basis of gas properties................................................... (130) Discontinued net refining operations...................................... 866 Investment in Network..................................................... 24 28 -------- ------- (39,422) (5,171) Valuation allowance....................................................... -------- ------- ($39,422) ($5,171) ======== ======= Deferred tax assets (liability) - current................................. Deferred tax assets - (liability) - long-term............................. ($39,422) ($5,171) ======== ======= ($39,422) ($5,171) ======== =======
-53- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) At September 30, 2004, the Company decreased its valuation allowance by $6,416 based upon its assessment of the amount of gross deferred tax asset that would more likely than not be realized based on an estimate of future taxable income. Approximately $3,500 of the decrease in the valuation allowance was recorded as a reduction in income tax expense. The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income (loss) from continuing operations before income taxes as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------- 2005 2004 2003 ---- ---- ---- Tax expense (benefit) at statutory rate........................... $ 983 $5,602 ($823) State taxes, net of federal benefit............................... 29 160 (15) Revision of tax estimates related to oil and gas tax credits...... (427) Revision of tax estimates related to statutory depletion.......... (130) Revision of other tax estimates................................... 128 (466) Increase (decrease) in valuation allowance........................ (6,416) 1,512 Tax exempt interest............................................... Change in valuation allowance credited to Paid-in Capital......... 2,911 ------ ------ ----- $1,012 $2,385 ($349) ====== ====== =====
At September 30, 2005, the Company had the following tax carryforwards available: FEDERAL TAX --------------------- ALTERNATIVE MINIMUM REGULAR TAX ------- ----------- Net operating loss.................................. $8,453 $14,014 Alternative minimum tax credits..................... $1,176 0 The regular net operating loss carryforwards expire through 2025. The alternative minimum tax net operating loss carryforwards expire from 2007 to 2025. The Company also estimates that it has approximately $67,700 in individual state tax loss carryforwards available at September 30, 2005. Most of such carryforwards are primarily available to offset taxable income apportioned to certain states in which the Company no longer has operations. As a result, it is probable at the present time that most of such state tax carryforwards will expire unused. -54- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) NOTE 20 - RELATED PARTIES During the years ended September 30, 2004 and 2003, Delta paid two officers of the Company $315 and $420, respectively, for consulting compensation for the period October 1, 2002 to May 31, 2004. As a result of the Company's sale of all of its domestic oil and gas properties to Delta on May 31, 2002, the Company had reduced the salaries of the two officers by approximately 65%. The Company paid Delta $172 for services provided in conjunction with operation of the Company's gas properties from March 30, 2004 to September 30, 2004. (See Note 4) In March 2004, the Company purchased gas properties from Delta and five limited partnerships, whose general partner was a company owned by an officer of the Company. (See Note 4) NOTE 21 - BUSINESS SEGMENTS As of September 30, 1995, the Company had disposed of its refining business (see Note 3) and operated in only two business segments - natural gas marketing and transmission and exploration and production. In May 1997, the Company sold its pipeline (natural gas transmission) to a subsidiary of UPRC. As a result, the Company was no longer in the natural gas transmission segment but continued to operate in the natural gas marketing and exploration and production segments. On May 31, 1999, the Company's long-term gas sales and gas supply contracts expired by their own terms and the Company exited the natural gas marketing business. During 2002, the equity method losses incurred as a result of the Company's investment in Network exceeded a threshold for identifying and reporting Network as an additional segment. Network is engaged in the planning, installation and operation of natural gas fueled energy generating facilities. This segment is referred to as the Power Business. The Company does not allocate interest income, interest expense or income tax expense to these segments.
YEAR ENDED SEPTEMBER 30, 2005 ------------------------------------------------------------------------------------------- NATURAL GAS OIL & GAS ELIMINATIONS MARKETING EXPLORATION AND AND AND REFINING POWER CORPORATE TRANSMISSION PRODUCTION (DISCONTINUED) BUSINESS ITEMS CONSOLIDATED ------------ ------------- -------------- ---------- ------------ -------------- Revenues ........................ $ 2,561 $ 2,561 Equity in net income (loss) of equity method investees........ $ 1,690 $5 $ 1,695 Operating income (loss) ......... ($ 817) ($ 1,799) ($ 2,616) Identifiable assets ............. $66,973 $76,085 $34,665 $ 177,723 Investment in equity method investees..................... $5 $ 5 Capital expenditures ............ $ 27 $ 101 $ 128 Depreciation, depletion and amortization .................. $ 457 $ 50 $ 507
-55- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------- NATURAL GAS OIL & GAS ELIMINATIONS MARKETING EXPLORATION AND AND AND REFINING POWER CORPORATE TRANSMISSION PRODUCTION (DISCONTINUED) BUSINESS ITEMS CONSOLIDATED ------------ ------------- -------------- ---------- ------------ -------------- Revenues ....................... $ 1,087 $ 1,087 Equity in net income (loss) of equity method investees... $ 1,352 $ 1,352 Operating income (loss) ........ 59 ($ 4,795) ($ 4,736) Identifiable assets ............ $66,973 $ 74,857 ($ 58,004) $ 83,826 Investment in equity method investees.................... $ 39,698 $ 39,698 Capital expenditures ........... $ 9,421 $ 22 $ 9,443 Depreciation, depletion and amortization ................ $ 195 $ 56 $ 251
YEAR ENDED SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------- NATURAL GAS OIL & GAS ELIMINATIONS MARKETING EXPLORATION AND AND AND REFINING POWER CORPORATE TRANSMISSION PRODUCTION (DISCONTINUED) BUSINESS ITEMS CONSOLIDATED ------------ ------------- -------------- ---------- ------------ -------------- Revenues ....................... Equity in net income (loss) of equity method investees....... $ 1,067 ($20) $ 1,047 Operating income (loss) ........ ($ 3,621) ($ 3,621) Identifiable assets ............ $66,971 $ 78,486 ($ 95,649) $ 49,808 Investment in equity method investees..................... $ 29,477 $ 29,477 Capital expenditures ........... Depreciation, depletion and amortization ................. $ 56 $ 56
For the year ended September 30, 2004, four purchasers of the Company's gas production accounted for 34%, 18%, 17% and 10%, respectively, of the Company's gas sales. For the year ended September 30, 2005, four purchasers accounted for 35%, 14%, 14% and 10% of the Company's gas sales. The Company had no oil or gas sales for the year ended September 30, 2003. NOTE 22 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents -- the carrying amount is a reasonable estimate of fair value. Marketable securities are related primarily to the Company's investment in Delta's common stock at September 30, 2005 and are recorded at fair market value. Market value for common stock is computed to equal the closing share price at year end times the number of shares held by the Company. -56- CASTLE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ("$000'S" OMITTED EXCEPT SHARE AMOUNTS) Other Current Assets and Current Liabilities - the Company believes that the book values of other current assets and current liabilities approximate the market values. NOTE 23 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (DECEMBER 31) (MARCH 31) (JUNE 30) (SEPTEMBER 30) ------------- ----------- ----------- -------------- Year Ended September 30, 2005: Revenues ................................ $699 $ 812 $456 $ 594 Operating income (loss).................. ($468) ($ 740) ($ 45) ($1,363) Net income (loss) ....................... $343 $2,880 ($496) ($4,318) Net income (loss) per share (diluted) ... $.05 $ .40 ($.07) ($ .61) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (DECEMBER 31) (MARCH 31) (JUNE 30) (SEPTEMBER 30) ------------- ----------- ----------- -------------- Year Ended September 30, 2004: Revenues ................................ $ 491 $ 596 Operating income (loss).................. ($1,251) ($ 1,198) ($1,601) ($ 686) Net income (loss) ....................... ($1,248) $12,168 $2,713 ($ 13) Net income (loss) per share (diluted) ... ($ .19) $ 1.77 $ .39 ($ .00)
The Company recorded a loss from discontinued operations of $3,392, net of a $1,505 tax benefit, in the fourth quarter of the year ended September 30, 2005. See Note 3. NOTE 24 - SUBSEQUENT EVENTS On November 8, 2005, the Company entered into an agreement to merge into Delta (see Note 1). Subsequent to September 30, 2005, a director of the Company exercised 90,000 options. Proceeds to the Company were $533. After the exercise of these options, no options remained outstanding. -57- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Castle Energy Corporation: We have audited the accompanying consolidated balance sheet of Castle Energy Corporation and subsidiaries as of September 30, 2005, and the related consolidated statements of operations, stockholders' equity and other comprehensive income (loss), and cash flows for the year ended September 30, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Castle Energy Corporation and subsidiaries as of September 30, 2005, and the results of their operations and their cash flows for the year ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Oklahoma City, Oklahoma November 18, 2005 -58- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Castle Energy Corporation: We have audited the accompanying consolidated balance sheet of Castle Energy Corporation and subsidiaries as of September 30, 2004, and the related consolidated statements of operations, stockholders' equity and other comprehensive income, and cash flows for each of the years in the two-year period ended September 30, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Castle Energy Corporation and subsidiaries as of September 30, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2004 in conformity with U.S. generally accepted accounting principles. KPMG LLP Houston, Texas December 14, 2004 -59- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES The conclusions of the Company's Chief Executive Officer and Chief Financial Officer concerning the effectiveness of the Company's disclosure controls and procedures and changes in internal controls as of September 30, 2005 are as follows: a) They have concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. b) There were no changes in the Company's internal controls during the quarter ended September 30, 2005 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting. See Exhibits 31.1 and 31.2 to this Form 10-K. -60- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information concerning the directors and executive officers of the Company as of December 7, 2005:
NAMED DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AGE POSITION(S) - ----------------------------- --- ----------- Sidney F. Wentz .............. 73 Chairman of the Board (1) Richard E. Staedtler.......... 61 Director, President and Chief Executive Officer of the Company (2) Martin R. Hoffmann............ 73 Director (3) John P. Keller................ 66 Director (2) Russell S. Lewis.............. 50 Director (3) Mary A. Cade.................. 42 Chief Financial Officer and Chief Accounting Officer William C. Liedtke III........ 54 Vice President and General Counsel
- ------------------- (1) Term expires at 2007 annual meeting of shareholders (2) Term expires at 2006 annual meeting of shareholders (3) Term expires at 2008 annual meeting of shareholders A description of the business experience of each of the directors and executive officers of the Company is as follows: SIDNEY F. WENTZ has been a director of the Company since June 1995 and became Chairman of the Board of Directors of the Company on August 15, 2005, following the death of Joseph L. Castle, founder of the Company. Previously, Mr. Wentz was Chairman of the Board of The Robert Wood Johnson Foundation, the nation's largest health care philanthropy from June 1989 until his retirement in 1999. Commencing in 1967, he held several positions with Crum and Forster, an insurance holding company, retiring as Chairman and Chief Executive Officer in 1988. He also was practiced law as an attorney with the law firm of White & Case and then Corporate Attorney for Western Electric Company/AT&T. Mr. Wentz is a director of Somerset Hills Bancorp and a trustee of Drew University. RICHARD E. STAEDTLER was elected President and Chief Executive Officer of the Company on August 15, 2005 and has been a director of the Company since May 1997. Between November 1994 and August 2005, he served as Senior Vice President and Chief Financial Officer of the Company. Mr. Staedtler also served as a director of the Company from 1986 through September 1992, and as Chief Financial Officer of the Company from 1984 through June 1993. Mr. Staedtler is a certified public accountant. Mr. Staedtler also serves as a director of Premium and Specialities, Inc., a private company which manufactures personalized specialty items, and is the President, sole director and sole stockholder of Terrapin Resources, Inc., a private oil and gas production company. MARTIN R. HOFFMANN has been a director of the Company since June 1995. Mr. Hoffmann was previously of counsel to the Washington, D.C. office of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. He was a Senior Visiting Fellow at the Center for Technology, Policy and Industrial Development of the Massachusetts Institute of Technology from May 1993 to May 1995 and a private business consultant since 1993. From 1989 to 1993, Mr. Hoffmann served as Vice President and General Counsel of Digital Equipment Corporation. Mr. Hoffmann also served in various capacities at the United States Department of Defense, including General Counsel from 1974 to 1975 and Secretary of the Army from 1975 to 1977 and currently serves as a consultant to the United States Department of Defense. He is a Director of Seachange International, Inc. of Maynard, Massachusetts as well as a trustee of CIME Endeavor Foundation. -61- JOHN P. KELLER has been a director of the Company since April 1997. Since 1972, Mr. Keller has served as the President of Keller Group, Inc., a privately-held corporation engaged in steel forging and coal mining in the midwestern United States. In 1993 and 1994, Mr. Keller also served as the Chairman of American Appraisal Associates, an appraisal company. Mr. Keller was previously a director of Delta Petroleum Corporation. RUSSELL S. LEWIS has been a director of the Company since April 2000. From 1994 to 1999, Mr. Lewis was the Chief Executive Officer of TransCore, Inc., a company which sells and installs electronic toll collection systems. Since 1999, Mr. Lewis has been the owner and President of Lewis Capital Group, a company investing in and providing consulting services to growth-oriented companies. Since March of 2000, Mr. Lewis has served in various capacities at Verisign, including General Manager of Verisign's Global Registry and his current position as Senior Vice President of Corporate Development. Mr. Lewis is also a director of Delta Petroleum Corporation. MARY A. CADE was appointed Chief Financial Officer of the Company on August 15, 2005 and Chief Accounting Officer on August 24, 2005, having served as Treasurer and Controller of the Company since 1994. Ms. Cade has an MBA in Finance from Philadelphia University. WILLIAM C. LIEDTKE III has been Vice President and General Counsel of the Company since February 2000. Prior to becoming an officer and employee of the Company, from April 1999 to January 2000, Mr. Liedtke was President of WCL III, Inc., a corporation wholly owned by Mr. Liedtke, in which capacity he provided services on a consulting basis to the Company with respect to the Company's investment in the concessions in Romania, as well as miscellaneous matters regarding domestic oil and gas properties of the Company. Upon the employment of Mr. Liedtke by the Company in February 2000, WCL III, Inc. ceased doing business with the Company and has been inactive thereafter. He served as Chief Executive Officer of Redeco Energy Inc. from October 1997 to March 1999, having previously served as its Vice President and Chief Operating Officer since February 1995. Mr. Liedtke served as an Independent General Partner of Merrill Lynch Oklahoma Venture Partners LP from August 1999 to December 2000, when the partnership wound up. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers, directors and owners of more than 10% of any class of the Company's securities registered pursuant to Section 12 of the Exchange Act to file reports of ownership and changes in ownership with the Commission. The Commission's rules also require such persons to furnish the Company with a copy of all Section 16(a) reports that they file. Based solely upon a review of the copies of the reports and written representations furnished to the Company, all such reporting persons complied with such reporting obligations during the fiscal year ended September 30, 2005. AUDIT COMMITTEE The Company has established an Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee consists of Mr. Hoffmann (Chairman), Mr. Keller and Mr. Lewis. All three Audit Committee members are outside directors. The functions of the Audit Committee are to: (a) appoint the Company's independent public accountants; (b) review the financial reports of the Company; (c) monitor the effectiveness of the independent audit; (d) assure that the scope and implementation of the independent audit is not restricted or the independence of the independent accountants compromised; (e) review the independent accountants' reports to management on internal controls and recommend such actions as may be appropriate; (f) review and approve any related party transactions and (g) review and approve any proposed engagement of all services performed by the Company's independent accountants. The Audit Committees has and will continue to have at least three members, all of whom meet, and will continue to meet, the requirements of Rule 4350(d)(2)(A) of the Nasdaq Stock Market's listing standards, including the definition of independence in Nasdaq Stock Market Rule 4200(a)(15) and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. The Audit Committee charter provides for meetings to be held at least quarterly. -62- The Nominating Committee consists of Mr. Lewis (Chairman), Mr. Hoffmann and Mr. Keller. All three Nominating Committee members are outside directors. The Nominating Committee at least annually assesses the appropriate skills and characteristics required of Board members in the context of the current make-up of the Board of Directors and the needs of the Company, and considers principles to be applied in filling vacancies and planning for Board succession. It assists the Board in the identification of individuals qualified to become Board members, considers and recommends director nominees to the Board of Directors prior to each annual meeting of stockholders and recommends nominees for committees of the Board. The Compensation Committee consists of Mr. Keller (Chairman), Mr. Hoffmann and Mr. Lewis, none of whom have ever been employees or officers of the Company or had any relationship requiring disclosure under Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission.. All three Compensation Committee members are outside directors. The Compensation Committee establishes overall compensation programs and policies for the Company. The Compensation Committee monitors the selection and performance as well as reviews and approves the compensation of key executives, and administers the Incentive Plan. All members of the Audit, Nominating and Compensation Committees are independent within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market's listing standards. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT The Board of Directors of the Company has determined that Mr. Russell Lewis is an audit committee financial expert. Mr. Lewis is independent within the meaning of Nasdaq Stock Market Rule 4200(a)(15) and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. CODE OF ETHICS FOR SENOR FINANCIAL OFFICERS In August 2003, the Company's Board of Directors adopted a Code of Ethics that applies to all of the Company's officers and directors, including its chief executive officer, chief financial officer, general counsel and controller. The requirements of that code provide for honest and ethical conduct; avoidance or ethical handling of conflicts of interest; full, fair and accurate and timely and transparent public disclosure; compliance with applicable governmental and self regulatory laws and rules; prompt internal reporting of code violations and accountability for compliance with the Code of Ethics. The Company is committed to and without charge will provide a copy of its Code of Ethics to any person upon written request addressed to the Secretary of the Company at its offices. -63- ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION The following table summarizes all compensation earned by the Company's Chief Executive Officer and each of the other executive officers (collectively with the Chief Executive Officer, the "Named Executive Officers") whose total annual salary and bonus exceeded $100,000 for the fiscal year ended September 30, 2005.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION AWARDS ------------ SECURITIES FISCAL YEAR ANNUAL COMPENSATION UNDERLYING ALL OTHER ENDED ---------------------- OPTIONS/ COMPENSATION (1) NAME AND PRINCIPAL POSITION SEPTEMBER 30, SALARY ($) BONUS ($) SARS (#) ($) - --------------------------- ------------- ---------------------- ------------ ---------------- Joseph L. Castle II (2)................ 2005 $218,750 $50,000 Formerly Chairman of the Board, 2004 $125,000 Chief Executive Officer and 2003 $125,000 $50,000 $2,877 Director of the Company Richard E. Staedtler (3)............... 2005 $185,428 $50,000 $7,625 President, Chief Executive 2004 $133,332 $5,333 Officer and Director of the Company 2003 $100,000 $5,983 Mary A. Cade (4)....................... 2005 $133,750 $20,000 $4,613 Chief Financial Officer and 2004 Chief Accounting Officer 2003 William C. Liedtke III................. 2005 $161,250 $15,000 $5,288 Vice President and 2004 $157,332 $10,000 $5,020 General Counsel 2003 $156,000 $10,000 $4,680
- ------------------- (1) Represents Company matching contributions under the Company's 401(k) Plan. (2) Mr. Castle, founder of the Company, served as Chairman of the Board, Chief Executive Officer and Director of the Company until his death on August 15, 2005. (3) Mr. Staedtler, a Director of the Company, served as Chief Financial Officer and Chief Accounting Officer until August 15, 2005, at which time he was appointed President and Chief Executive Officer. (4) Ms. Cade served as Treasurer and Controller until August 15, 2005, at which time she was appointed Chief Financial Officer and on August 24, 2005, she was also appointed Chief Accounting Officer. Prior to 2005, she was not a Named Executive Officers and her compensation did not exceed $100,000. OPTION GRANTS IN LAST FISCAL YEAR No options were granted to the Named Executive Officers during the fiscal year ended September 30, 2005. -64- AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table shows certain information regarding the exercise of stock options during the fiscal year ended September 30, 2005 and the total number of unexercised options held at September 30, 2005 by the Named Executive Officers. There were no unexercised options held by any of the Named Executive Officers as of September 30, 2005. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END SHARES VALUE (#) ($) ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) $ UNEXERCISABLE UNEXERCISABLE - ---- ------------ --------- --------------- --------------- Joseph L. Castle II............ -/- -/- -/- -/- Richard E. Staedtler........... -/- -/- -/- -/- William C. Liedtke, III........ 45,000 $131,400 -/- -/- Mary A. Cade................... -/- -/- -/- -/-
SEVERANCE/RETENTION AGREEMENTS Upon his employment by the Company, Mr. Liedtke received a severance agreement which provides for one month of severance compensation for each full year of employment by the Company, with a minimum compensation of three months' base salary, in the event substantially all of the Company's assets are sold and Mr. Liedtke is terminated as a result of such sale. COMPENSATION OF DIRECTORS Each outside directors receives an annual director fee of $20,000. In addition, all outside directors receive a fee of $1,500 for each meeting of the board of directors attended. Committee members also receive a $500 fee for attending each committee meeting. -65- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL HOLDERS OF VOTING SECURITIES The following table sets forth, as of November 25, 2005, the names of all persons who were known by the Company to be the beneficial owners [as defined in the rules of the Securities and Exchange Commission (the "Commission")], of more than five percent of the shares of Common Stock of the Company:
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(1) - ------------------------------------ -------------------- ------------ Sally W. Castle and the Estate of Joseph L. Castle II 1,490,624(2) 20.40% 357 South Gulph Road Suite 260 King of Prussia, Pennsylvania 19406 1,167,000(3) 15.97% FMR Corp. 82 Devonshire Street Boston, Massachusetts 02109 777,550 (4) 10.64% Kestrel Investment Management 411 Borel Avenue, Suite 403 San Mateo, California 94402 Dimensional Fund Advisors, Inc. 521,150 (5) 7.13% 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401-1038
- ------------------- (1) Based on a total of 7,305,360 shares of Common Stock issued and outstanding as of November 25, 2005. Information in the above table and footnotes is based upon the most recent respective statement on Form 4, Schedule 13D or 13G or amendment thereto filed by such persons with the SEC, except as otherwise known to the Company. (2) Sally W. Castle is the executor of the Estate of Joseph L. Castle, II (the "Estate"). She is deemed to beneficially own 1,490,624 shares of Common Stock which consists of 1,434,699 shares of Common Stock owned by the Estate and 55,925 shares of Common Stock directly owned by Mrs. Castle. (3) According to the Schedule 13G filed February 14, 2001 by FMR Corp., Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary of FMR Corp. and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 1,167,000 shares of the common stock outstanding of the Company as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of one investment company, Fidelity Low Priced Stock Fund, amounted to 1,167,000 shares of the common stock outstanding. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the funds each has sole power to dispose of the 1,167,000 shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees. Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR Corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp. -66- (4) According to the Schedule 13G filed February 14, 2005 by Kestrel Investment Management, Kestrel is deemed to be the beneficial owner of the 777,550 shares of the common stock of the Company pursuant to separate arrangements whereby it acts as investment adviser to certain persons in which it also holds an ownership interest. Each person for whom Kestrel acts as investment adviser has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the common stock purchased or held pursuant to such arrangements. David J. Steirman and Abbott J. Keller are deemed to be the beneficial owners of the shares of the common stock of the Company pursuant to their ownership interests in Kestrel Investment Management Corporation. (5) According to the Schedule 13G filed February 9, 2005 by Dimensional Fund Advisors Inc., Dimensional is an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, which furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the "Funds". In its role as investment advisor or manager, Dimensional possesses voting and/or investment power over the common stock of the Company owned by the Funds, and may be deemed to be the beneficial owner of the common stock of the Company held by the Funds. However, all of such shares are owned by the Funds, no one advisory client of which, to the knowledge of Dimensional, owns more than 5% of the class. Dimensional disclaims beneficial ownership of the shares. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of November 25, 2005, the shares of Common Stock beneficially owned by each executive officer named in the Summary of Compensation Table below (the "Named Executives"), by each director of the Company and by the directors and executive officers of the Company as a group, with sole voting and investment power unless otherwise indicated:
AMOUNT AND NATURE OF PERCENT OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS (1) (2) - ------------------------ ------------------------ ------------- Richard E. Staedtler........................................... 74,650 1.02% Martin R. Hoffmann............................................. 86,000(3) 1.18% Sidney F. Wentz................................................ 78,000 1.07% John P. Keller................................................. 111,000 1.52% Russell S. Lewis............................................... 62,000 - Mary A. Cade................................................... - - William C. Liedtke, III........................................ - - All directors and executive officers as a group (7 persons)................................................. 411,650 5.63%
- ------------------- (1) Based 7,305,360 shares of Common Stock issued and outstanding as of November 25, 2005. (2) Percentages of less than one percent are omitted. (3) Includes 6,000 shares of Common Stock owned by an individual retirement account for the benefit of Mr. Hoffmann. -67- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - NONE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Fees billed to the Company by the Company's independent accountants, Grant Thornton LLP and KPMG LLP, for work applicable to the periods indicated, were as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2005 2004 ---------- ---------- Audit fees............................................................. $129,384 $125,651 Audit - related fees................................................... Tax fees............................................................... All other fees......................................................... -------- -------- $129,384 $125,651 ======== ======== Independent accountant................................................. Grant Thornton KPMG LLP
The policy of the Audit Committee of the Company is to pre-approve all material professional services performed by the Company's independent accountant. -68- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial statements and schedules filed as part of this Report on Form 10-K are listed in Item 8 of this Form 10-K. (b) Exhibits The Exhibits required by Item 601 of Regulation S-K and filed herewith or incorporated by reference herein are listed in the Exhibit Index below.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT -------------- ----------------------- 3.1 Restated Certificate of Incorporation(15) 3.2 Bylaws(10) 4.1 Specimen Stock Certificate representing Common Stock(8) 4.2 Rights Agreement between Castle Energy Corporation and American Stock Transfer and Trust Company as Rights Agent, dated as of April 21, 1994(10) 10.33 Castle Energy Corporation 1992 Executive Equity Incentive Plan(8) 10.34 First Amendment to Castle Energy Corporation 1992 Executive Equity Incentive Plan, effective May 11, 1993(8) 10.124 Asset Purchase Agreement dated February 27, 1998 by and between Castle Energy Corporation and Alexander Allen, Inc. (21) 10.132 Castle Energy Corporation Severance Benefit Plan (26) 10.140 Agreement to Transfer a Membership Interest In Networked Energy LLC to CEC, Inc., dated August 31, 2000 (31) 10.142 Purchase and Sale Agreement, dated April 1, 2001, between Strand Energy LC and Castle Exploration Company, Inc. (30) 10.143 Credit Agreement as of November 26, 2001 among Castle Exploration Company, Inc. and Castle Energy Corporation and Bank of Texas National Association (37) 10.144 Purchase and Sale Agreement between Castle Energy Corporation and Delta Petroleum Corporation, executed January 15, 2002 (32) 10.145 Amendment Number One to Purchase and Sale Agreement between Castle Energy Corporation and Delta Petroleum Corporation, March 2002 (33) 10.146 Purchase and Sale Agreement between Redeco Petroleum Company Limited and Hemco Romania Limited, dated September 6, 2002 (35) 10.147 Amendment of Rights Agreements between Castle Energy Corporation and American Stock Transfer Company as Rights Agent, dated December 31, 2002 (36) 10.148 Purchase and Sale Agreement between Delta Petroleum Corporation and Castle Exploration Company, Inc., dated March 30, 2004 (37) 10.149 Settlement Agreement and Mutual Release, dated September 19, 2005, between Chevron Environmental Management Company, Chevron Environmental Service Company and Texaco Inc. and Castle Energy Corporation, Indian Refining I Limited Partnership, Indian Refining & Marketing I Inc. and William S. Sudhaus (38) 10.150 Agreement and Plan of Merger, dated as of November 8, 2005, among Delta Petroleum Corporation, a Colorado corporation; Delta Petroleum Corporation, a Delaware corporation; DPCA LLC, a Delaware limited liability company and Castle Energy Corporation (39)
-69-
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT -------------- ----------------------- 10.151 Voting Agreement, dated as of November 3, 2005, among Delta Petroleum Corporation, a Colorado corporation; Delta Petroleum Corporation, a Delaware corporation; DPCA LLC, a Delaware limited liability company and Certain Stockholders of Castle Energy Corporation 10.152 First Amendment to Voting Agreement and Irrevocable Proxy, dated as of November 28, 2005, among Delta Petroleum Corporation, a Colorado corporation; Delta Petroleum Corporation, a Delaware corporation; DPCA LLC, a Delaware limited liability company and Certain Stockholders of Castle Energy Corporation 11.1 Statement re: Computation of Earnings Per Share 21 List of subsidiaries of Registrant 21.1 Separate financial statements of Delta Petroleum Corporation - Year Ended June 30, 2005 23.3 Consent of Ralph Davis & Co. 31.1 Certificate of Chief Executive Officer (Section 302 of Sarbanes-Oxley Act) 31.2 Certificate of Chief Financial Officer (Section 302 of Sarbanes-Oxley Act) 32.1 Certificate of Chief Executive Officer (Section 906 of Sarbanes-Oxley Act) 32.2 Certificate of Chief Financial Officer (Section 906 of Sarbanes-Oxley Act) (8) Incorporated by reference to the Registrant's Form S-1 (Registration Statement), dated September 29, 1993 (File 33-69626) (10) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended March 31, 1994 (File 0-10990) (15) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1994 (File 0-10990) (23) Incorporated by reference to the Registrant's Form 10-Q for quarter ended March 31, 1998 (File 0-10990) (26) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1999 (File 0-10990) (30) Incorporated by reference to the Registrant's Form 10-Q for quarter ended March 31, 2001 (File 0-10990) (31) Incorporated by reference to the Registrant's Form 10-K for year ended September 30, 2000 (File 0-10990) (32) Incorporated by reference to the Registrant's Form 10-Q for quarter ended December 31, 2001 (File 0-10990) (33) Incorporated by reference to the Registrant's Form 10-Q for quarter ended March 31, 2002 (File 0-10990) (35) Incorporated by reference to the Registrant's Form 10-Q for quarter ended September 30, 2002 (File 0-10990) (36) Incorporated by reference to the Registrant's Form 10-Q for quarter ended December 31, 2002 (File 0-10990) (37) Incorporated by reference to the Registrant's Form 10-Q for quarter ended March 31, 2004 (File 0-10990) (38) Incorporated by reference to the Registrant's Form 8-K, dated September 23, 2005 (File 0-10990) (39) Incorporated by reference to the Registrant's Amendment #3 to Schedule 13D, dated December 1, 2005 (File 0-10990)
-70- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. CASTLE ENERGY CORPORATION Date: December 1, 2005 By: /S/RICHARD E. STAEDTLER ---------------------------- Richard E. Staedtler Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ RICHARD E. STAEDTLER Chief Executive Officer December 1, 2005 - -------------------------- Director Richard E. Staedtler /s/ MARY A. CADE Chief Financial Officer December 1, 2005 - -------------------------- Chief Accounting Officer Mary A. Cade /s/ MARTIN R. HOFFMANN Director December 1, 2005 - -------------------------- Martin R. Hoffmann /s/ JOHN P. KELLER Director December 1, 2005 - -------------------------- John P. Keller /S/ RUSSELL S. LEWIS Director December 1, 2005 - -------------------------- Russell S. Lewis /s/ SIDNEY F. WENTZ Chairman December 1, 2005 - -------------------------- Sidney F. Wentz -71- DIRECTORS, OFFICERS, BOARD OF DIRECTORS AND PROFESSIONALS (DECEMBER 1, 2005)
RICHARD E. STAEDTLER SIDNEY F. WENTZ President and Chief Executive Officer Chairman Former Chairman of The Robert Wood Johnson Foundation MARTIN R. HOFFMANN RUSSELL S. LEWIS Former Secretary of the Army President, Lewis Capital Group JOHN P. KELLER President, Keller Group, Inc. OPERATING OFFICERS RICHARD E. STAEDTLER WILLIAM C. LIEDTKE III President and Chief Executive Officer Vice President and General Counsel MARY A. CADE Chief Financial Officer Chief Accounting Officer PRINCIPAL OFFICES 357 South Gulph Road 512 Township Line Road Suite 260 Three Valley Square, Suite 100 King of Prussia, PA 19406 Blue Bell, PA 19422 5623 North Western Avenue, Suite A Oklahoma City, OK 73118 PROFESSIONALS COUNSEL REGISTRAR AND TRANSFER AGENT Duane Morris LLP American Stock Transfer & Trust 30 South 17th Street 40 Wall Street, 46th Floor Philadelphia, PA 19103 New York, New York 10005 INDEPENDENT ACCOUNTANTS Grant Thornton LLP One Leadership Square 211 N. Robinson, Suite 1200 Oklahoma City, OK 73102
EX-10 2 ex10-151.txt EX10-151.TXT EXHIBIT 10.151 VOTING AGREEMENT AND IRREVOCABLE PROXY -------------------------------------- This Voting Agreement and Irrevocable Proxy (this "AGREEMENT") dated as of November ___, 2005 is executed by and among Delta Petroleum Corporation, a Delaware corporation ("HOLDINGS"), Delta Petroleum Corporation, a Colorado corporation ("DP COLORADO"), DPCA LLC, a Delaware limited liability company and wholly-owned subsidiary of DP Colorado ("ACQUISITION"), and the undersigned stockholders of Castle Energy Corporation (referred to herein individually as a "STOCKHOLDER" and collectively as the "STOCKHOLDERS"). WHEREAS, Holdings, DP Colorado, Acquisition, and Castle Energy Corporation, a Delaware corporation (the "COMPANY") have executed that certain Agreement and Plan of Merger dated as of November 8, 2005 (the "MERGER AGREEMENT") whereby Company will be merged with and into Acquisition, and Acquisition will be the surviving company (the "MERGER"); and WHEREAS, as a condition to its willingness to enter into the Merger Agreement, Holdings, DP Colorado and Acquisition have required that each of the undersigned Stockholders enter into and each of the Stockholders has agreed to enter into this Agreement; and WHEREAS, Holdings, DP Colorado and Acquisition are relying on this Agreement and the irrevocable proxies in incurring expense in reviewing Company's business, in preparing the Merger Agreement and in undertaking other actions necessary for the consummation of the Merger. NOW THEREFORE, the parties hereto agree as follows: 1. Each Stockholder hereby represents and warrants to Holdings, DP Colorado and Acquisition that such Stockholder (a) is the registered and beneficial owner of and has the exclusive right to vote the shares of capital stock of Company set forth below his, her or its name on the signature page hereto ("SHARES"), and (b) has not entered into and is not a party of any voting agreement or voting trust with respect to the Shares. 2. Each Stockholder agrees that, from and after the date hereof and until the date on which this Agreement is terminated pursuant to Section 6 hereof, at any Company stockholders meeting, or any adjournment thereof (a "MEETING"), such Stockholder shall: (a) appear at each such meeting or otherwise cause the Shares to be counted as present thereat for purposes of calculating a quorum; and (b) vote (or cause to be voted), in person or by proxy, or deliver a written consent (or cause a consent to be delivered) covering, all the Shares, and any other voting securities of the Company (whenever acquired), that are beneficially owned by such Stockholder or as to which such Stockholder has, directly or indirectly, the right to vote or direct the voting, in favor of approval of the Merger Agreement and the Merger. 3. Each Stockholder hereby revokes any previously executed proxies and hereby constitutes and appoints Roger Parker and Kevin Nanke (the "PROXY HOLDER"), each of them individually, with full power of substitution, as his, her or its true and lawful proxy and attorney-in-fact to vote at any Meeting all of such Stockholder's Shares in favor of the authorization and approval of the Merger Agreement, the Merger and the other agreements and transactions contemplated thereby, with such modifications to the Merger Agreement and the other agreements and transactions contemplated thereby as the parties thereto may make. 4. Each Stockholder hereby covenants and agrees that, except as set forth on Schedule 1 hereto, until this Agreement is terminated in accordance with its terms, each Stockholder will not, and will not agree to, without the consent of DP Colorado: (a) directly or indirectly, sell, transfer, assign, pledge, hypothecate, cause to be redeemed, or otherwise dispose of any of the Shares; (b) grant any proxy or interest in or with respect to any such Shares; (c) deposit such shares into a voting trust; or (d) enter into another voting agreement or arrangement with respect to such Shares except as contemplated by this Agreement, unless the Stockholder causes the transferee of such Shares to deliver to DP Colorado an amendment to this Agreement whereby such transferee or other holder becomes bound by the terms of this Agreement. 5. The Stockholders acknowledge that Holdings, DP Colorado and Acquisition are relying on this Agreement in incurring expense in reviewing Company's business, in preparing for the Merger and in undertaking other actions necessary for the consummation of the transactions contemplated in the Merger Agreement and that the proxy granted hereby is coupled with an interest and is irrevocable to the full extent permitted by applicable law, including Section 212 of the Delaware General Corporation Law. The Stockholders acknowledge that the performance of this Agreement is intended to benefit Holdings, DP Colorado and Acquisition. 6. The voting agreement and irrevocable proxy granted pursuant hereto shall continue in effect until the earlier to occur of (a) the termination of the Merger Agreement, as it may be amended or extended from time to time, or (b) the consummation of the Merger. 7. This Agreement may not be modified, amended, altered or supplemented in any respect except upon the execution and delivery of a written agreement executed by Holdings, DP Colorado, Acquisition, and the Stockholders. 8. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 9. This Agreement, together with the Merger Agreement and the agreements contemplated thereby, embody the entire agreement and understanding of the parties hereto in respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to the subject matter contained herein. 10. All notices, requests, demands, and other communications required or permitted hereby shall be in writing and shall be deemed to have been duly given if delivered by hand or by certified or registered mail (return receipt requested) with postage prepaid to the addresses of the parties hereto set forth on below their signature on the signature pages hereof or to such other address as any party may have furnished to the others in writing in accordance herewith. 11. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to specific performance of the terms hereof, this being in addition to any other remedy to which they are entitled at law or in equity. Each of the parties further agrees to waive any requirements for the securing or posting of any bond in connection with obtaining any such equitable relief. 12. This Agreement and the relations among the parties hereto arising from this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. [SIGNATURE PAGES FOLLOW] -2- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date above written. /S/ ROGER A. PARKER -------------------------------------------------- Delta Petroleum Corporation /S/ ROGER A. PARKER -------------------------------------------------- Delta Petroleum Corporation /S/ ROGER A. PARKER -------------------------------------------------- DPCA LLC, by its Sole Member /S/ SALLY W. CASTLE -------------------------------------------------- Estate of Joseph L. Castle II, by Sally W. Castle, Executor 1,434,699 Shares /S/ SALLY W. CASTLE -------------------------------------------------- Sally W. Castle 55,925 Shares /S/ RICHARD E. STAEDTLER -------------------------------------------------- Richard E. Staedlter 74,600 Shares /S/ MARTIN R. HOFFMANN -------------------------------------------------- Martin R. Hoffman 36,000 Shares RUSSELL S. LEWIS -------------------------------------------------- Russell S. Lewis 62,000 Shares JOHN P. KELLER -------------------------------------------------- John P. Keller 111,000 Shares SIDNEY F. WENTZ -------------------------------------------------- Sidney F. Wentz 78,000 Shares JOSEPH L. CASTLE III -------------------------------------------------- Joseph L. Castle III 218,784 Shares /S/ KATHRYN VAN BLARCOM -------------------------------------------------- Kathryn Van Blarcom 61,385 Shares /S/ SALLIE B. HARDER -------------------------------------------------- Sallie B. Harder 189,885 Shares -3- Schedule 1 Estate of Joseph L. Castle II may sell up to 150,000 Shares Kathryn Van Blarcom, Sallie B. Harder and Joseph L. Castle III may each sell up to 33,333 Shares, subject to the right to reapportion such number among themselves as they shall determine EX-10 3 ex10-152.txt EX10-152.TXT EXHIBIT 10.152 FIRST AMENDMENT TO VOTING AGREEMENT AND IRREVOCABLE PROXY This is the First Amendment to the Voting Agreement and Irrevocable Proxy (the "Voting Agreement") made as of November 28, 2005 by and among Delta Petroleum Corporation, a Delaware corporation ("Holdings"), Delta Petroleum Corporation, a Colorado corporation ("DP Colorado"), DPCA LLC, a Delaware limited liability company and wholly-owned subsidiary of DP Colorado ("Acquisition") and the undersigned stockholders of Castle Energy Corporation (the "Stockholders"). RECITALS -------- WHEREAS, in connection with an Agreement and Plan of Merger (the "Merger Agreement") dated as of November 8, 2005 by and among Holdings, DP Colorado, Acquisition and Castle Energy Corporation, a Delaware corporation ("Castle"), the Stockholders entered into the Voting Agreement pursuant to which the Stockholders agreed, among other things, to vote their shares in Castle in favor of the Merger Agreement and the merger contemplated therein; and WHEREAS, Holdings, DP Colorado, Acquisition and the Stockholders wish to modify the Voting Agreement by entering into this First Amendment to the Voting Agreement to reflect the changes specifically set forth below. AGREEMENT --------- NOW, THEREFORE, in accordance with Section 7 of the Voting Agreement, Holdings, DP Colorado, Acquisition and the Stockholders agree as follows: 1. Schedule 1 to the Voting Agreement is amended and restated as follows: "Schedule 1 ----------- Estate of Joseph L. Castle II and Sallie W. Castle may sell up to an aggregate of 150,000 Shares Kathryn Van Blarcom, Sallie B. Harder and Joseph L. Castle III may each sell up to 33,333 Shares, subject to the right to reapportion such number among themselves as they shall determine" 2. This First Amendment is effective as of November 28, 2005 (the "Effective Date"). 3. Except as modified by this First Amendment, the Voting Agreement shall remain in full force and effect. [Signature pages follow] IN WITNESS WHEREOF, the parties have executed this First Amendment as of the Effective Date above written. /S/ ROGER A. PARKER -------------------------------------------------- Delta Petroleum Corporation /S/ ROGER A. PARKER -------------------------------------------------- Delta Petroleum Corporation /S/ ROGER A. PARKER -------------------------------------------------- DPCA LLC, by its Sole Member /S/ SALLY W. CASTLE -------------------------------------------------- Estate of Joseph L. Castle II, by Sally W. Castle, Executor 1,434,699 Shares /S/ SALLY W. CASTLE -------------------------------------------------- Sally W. Castle 55,925 Shares /S/ RICHARD E. STAEDTLER -------------------------------------------------- Richard E. Staedlter 74,600 Shares /S/ MARTIN R. HOFFMANN -------------------------------------------------- Martin R. Hoffman 36,000 Shares /S/ RUSSELL S. LEWIS -------------------------------------------------- Russell S. Lewis 62,000 Shares /S/ JOHN P. KELLER -------------------------------------------------- John P. Keller 111,000 Shares /S/ SIDNEY F. WENTZ -------------------------------------------------- Sidney F. Wentz 78,000 Shares /S/ JOSEPH L. CASTLE III -------------------------------------------------- Joseph L. Castle III 218,784 Shares /S/ KATHRYN VAN BLARCOM -------------------------------------------------- Kathryn Van Blarcom 61,385 Shares /S/ SALLIE B. CASTLE -------------------------------------------------- Sallie B. Castle 189,885 Shares 2 EX-11 4 ex11-1.txt EX11-1.TXT EXHIBIT 11.1 (1 OF 2) CASTLE ENERGY CORPORATION STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ 2005 2004 ------------------------- -------------------------- BASIC DILUTED BASIC DILUTED ---------- ---------- ----------- ---------- I. Shares Outstanding, Net of Treasury 6,870,384 6,870,384 6,592,884 6,592,884 Stock purchased and options exercised during the period...................... 182,320 182,320 82,654 82,654 ---------- ---------- ----------- ---------- Stock, net............................... 7,052,704 7,052,704 6,675,538 6,675,538 Surrender of treasury stock (weighted)... (11) (11) ---------- ---------- ----------- ---------- 7,052,693 7,052,693 6,675,538 6,675,538 II. Weighted Equivalent Shares: Assumed options and warrants exercised... 257,744 ---------- ---------- ----------- ---------- III. Weighted Average Shares and Equivalent Shares 7,052,693 7,052,693 6,675,538 6,933,282 ========== ========== =========== ========== IV. Net Income (Loss).............................. (1,591) (1,591) $ 13,620 $ 13,620 ========== ========== ============ ========== V. Net Income (Loss) Per Share.................... ($ .23) ($ .23) $ 2.04 $ 1.96 ========== ========== =========== ==========
EXHIBIT 11.1 (2 OF 2) CASTLE ENERGY CORPORATION STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------ 2005 2004 ------------------------- -------------------------- BASIC DILUTED BASIC DILUTED ---------- ---------- ----------- ---------- I. Shares Outstanding, Net of Treasury 7,215,360 7,215,360 6,720,384 6,720,384 Stock purchased and options exercised during the period................... 22,800 22,800 ---------- ---------- ----------- ---------- Stock, net.............................. 7,215,360 7,215,360 6,743,184 6,743,184 Purchase of treasury stock (weighted)... ---------- ---------- ----------- ---------- 7,215,360 7,215,360 6,743,184 6,743,184 II. Weighted Equivalent Shares: Assumed options and warrants exercised.. 296,064 ---------- ---------- ----------- ---------- III. Weighted Average Shares and Equivalent Shares 7,215,360 7,215,360 6,743,184 7,039,248 ========== ========== =========== ========== IV. Net Income (Loss)............................. ($ 4,318) ($ 4,318) ($ 13) ($ 13) ========== ========== =========== ========== V. Net Income (Loss) Per Share................... ($ .61) ($ .61) ($ .00) ($ .00) ========== ========== =========== ==========
EX-21 5 ex21.txt EX21.TXT EXHIBIT 21 CASTLE ENERGY CORPORATION LISTING OF PARENT AND SUBSIDIARIES AS OF DECEMBER 1, 2005
COMPANY'S RELATIONSHIP OWNERSHIP ENTITY TO COMPANY BUSINESS PERCENTAGE ------ ---------- -------- ---------- Parent: Castle Energy Corporation Parent Holding company N/A Refining: Indian Oil Company Subsidiary Limited Partner of IRLP inactive 100% Indian Refining I. L.P. ("IRLP") Subsidiary Inactive 100% Limited Partnership Indian Refining & Marketing I Inc. Subsidiary General Partner of IRLP inactive 100% Exploration and Production: Castle Oil and Gas L.P. Subsidiary Oil and gas production inactive 100% Limited Partnership Castle Exploration Company, Inc. Subsidiary Oil and gas production 100% Passive Investment: CEC, Inc. Subsidiary Passive activities 100%
EX-31 6 ex31-1.txt EX31-1.TXT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Richard E. Staedtler, certify that: (1) I have reviewed this annual report on Form 10-K of Castle Energy Corporation for the year ended September 30, 2005. (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(a) and (15d-15e) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, analyze and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ RICHARD E. STAEDTLER - ----------------------------- Richard E. Staedtler Chief Executive Officer December 1, 2005 EX-31 7 ex31-2.txt EX31-2.TXT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Mary A. Cade, certify that: (1) I have reviewed this annual report on Form 10-K of Castle Energy Corporation for the year ended September 30, 2005. (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(a) and (15d-15e) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, analyze and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ MARY A. CADE - -------------------- Mary A. Cade Chief Financial Officer December 1, 2005 EX-32 8 ex32-1.txt EX32-1.TXT Exhibit 32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned, Richard E. Staedtler, Chief Executive Officer of Castle Energy Corporation (the "Company"), hereby certifies that: a) The Company's Form 10-K Annual Report for the year ended September 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 1, 2005 /S/ RICHARD E. STAEDTLER ---------------- ------------------------ Richard E. Staedtler Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Castle Energy Corporation and will be retained by Castle Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 9 ex32-2.txt EX32-2.TXT Exhibit 32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned, Mary A. Cade, the Vice President and Chief Financial Officer of Castle Energy Corporation, hereby certifies that: I. The Company's Form 10-K Annual Report for the year September 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and II. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 1, 2005 /S/ MARY A. CADE ---------------- ---------------- Mary A. Cade Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Castle Energy Corporation and will be retained by Castle Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----