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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, 1995
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
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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)
One Radnor Corporate Center
Suite 250
100 Matsonford Road 19087
Radnor, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (610) 995-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock-- $.50
par value and related Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
As of February 29, 1996, there were 6,693,646 shares of the
registrant's Common Stock ($.50 par value) outstanding. The aggregate market
value of voting stock held by non-affiliates of the registrant as of such date
was $49,166,484 (6,243,363 shares at $7.875 per share).
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CASTLE ENERGY CORPORATION
1995 FORM 10-K
TABLE OF CONTENTS
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Item Page
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PART I
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1. and 2. Business and Properties................................................................ 1
3. Legal Proceedings...................................................................... 8
4. Submission of Matters to a Vote of Security Holders.................................... 11
PART II
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5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 12
6. Selected Financial Data................................................................ 13
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 15
8. Financial Statements and Supplementary Data............................................ 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................. 67
PART III
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10. Directors and Executive Officers of the Registrant...................................... 67
11. Executive Compensation.................................................................. 69
12. Security Ownership of Certain Beneficial Owners and Management.......................... 75
13. Certain Relationships and Related Transactions.......................................... 77
PART IV
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14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 80
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Castle Energy Corporation (the "Company") is primarily engaged in
natural gas marketing and transmission and oil and gas exploration and
production in the United States. During the period from 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 Indian Refinery, an 86,000 barrel per day (B/D) refinery
located in Lawrenceville, Illinois. Powerine Oil Company ("Powerine") , another
subsidiary of the Company, owned and operated a 49,500 B/D refinery located in
Santa Fe Springs, California. By September 30, 1995, the Company had terminated
and discontinued all of its refining operations.
The Company engages in natural gas marketing operations which provide
gas to Lone Star Gas Company, a division of ENSERCH Corporation ("Lone Star"),
pursuant to a take-or-pay contract for natural gas through May 31, 1999 ("Lone
Star Contract"). At February 29, 1996, 53 billion cubic feet of natural gas were
to be provided to Lone Star. The Company has proved reserves and fixed price gas
purchase contracts in place for the supply of all of the natural gas necessary
to fulfill commitments under the Lone Star Contract and, accordingly, has fixed
a substantial portion of its gross margin with respect to its gas marketing
operation. The Company delivers natural gas to Lone Star through the Company's
77-mile intrastate pipeline located in Rusk County, Texas. At September 30,
1995, the Company's exploration and production operations had proved reserves of
approximately 56.6 billion cubic feet of natural gas and 351,000 barrels of oil.
During the period from September 1989 to October 14, 1994, a substantial
portion of the Company's stock was owned by Metallgesellschaft Corp. ("MG"), a
wholly-owned subsidiary of Metallgesellschaft A.G. ("MG AG"), a German
conglomerate. During this period, MG provided financing and crude supplies to
IRLP and Powerine and entered into processing and product offtake agreements
with them. These and other transactions with MG and its affiliates are
summarized in footnote 21 to the financial statements, which are included as
Item 8 to this Form 10-K. In December 1993, it was reported that MG AG had
incurred substantial losses as a result of hedging and other related activities.
Thereafter, MG sought to terminate its on-going relationships with the Company.
In October 1994, the Company and MG completed the restructuring of such
relationships ("MG Settlement"). As a result, substantially all of the Company's
contractual relationships with MG and its affiliates were amended or terminated.
Subsequent to the MG Settlement, the Company sought to dispose of its two
refineries and to expand its natural gas marketing and transmission and
exploration and production businesses. Operations at the Powerine Refinery
ceased in July 1995 and operations at the Indian Refinery ceased by September
30, 1995. On September 29, 1995, Powerine sold (for legal purposes) the Powerine
Refinery to Kenyen Projects Limited ("Kenyen"). On January 16, 1996, Powerine
merged into a subsidiary of Energy Merchant Corp. ("EMC"). On December 12, 1995,
IRLP sold the Indian Refinery to American Western Refining L.P. ("American
Western"), a subsidiary of Gadgil Western Corporation ("Gadgil"). For accounting
purposes, refining operations were classified as discontinued operations in the
Company's financial statements as of September 30, 1995 and retroactively for
the fiscal years ended September 30, 1994 and 1993 (see Note 3 to the
consolidated financial statements included as Item 8 to this Form 10-K).
See Note 22 to the Company's Consolidated Financial Statements for
information with respect to the Company's identifiable industry segments for the
years ended September 30, 1995, 1994 and 1993.
On March 5, 1996, the Company engaged an investment banking firm to
explore strategic alternatives to enhance stockholder value and to act as the
Company's exclusive advisor.
NATURAL GAS MARKETING AND TRANSMISSION
General
On December 3, 1992, the Company, through three wholly-owned subsidiary
limited partnerships, CEC Gas Marketing Limited Partnership ("Marketing"),
Castle Texas Pipeline Limited Partnership ("Pipeline") and Castle Texas
Production Limited Partnership ("Production"), acquired from Atlantic Richfield
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Company ("ARCO"), a gas contract with Lone Star Gas Company, a 77-mile pipeline
in Rusk County, Texas (the "Castle Pipeline"), majority working interests in
approximately 100 producing oil and gas wells and several gas supply contracts
for an aggregate purchase price of approximately $103.7 million, including cash,
assumption of debt and certain transaction costs. Upon acquiring these assets,
the Company entered a new segment of the oil and gas business, natural gas
marketing and transmission. The Company, through Marketing, sells 69% of its
natural gas production to Lone Star and the balance to a variety of customers
pursuant to fixed price contracts and in spot markets.
Assets
Gas Contract
Pursuant to the terms of the Lone Star Contract, Marketing sells natural
gas to Lone Star at a fixed price per thousand Btu ("MBtu"), plus transportation
and certain other charges. The Lone Star Contract, which expires in May 1999,
provides for minimum deliveries averaging 45.2 million cubic feet per day. The
contract also includes a take-or-pay provision whereby Lone Star must pay for
60% of the monthly contract volume whether or not it takes such volume (although
deficiencies in one month may, subject to certain limitations, be taken in
subsequent months without additional payments). Company management anticipates
that 19% of annual contract volumes can be supplied from wells currently
operated by Production. Pursuant to a gas purchase contract between Marketing
and MG Natural Gas Corp. ("MGNG"), a wholly-owned subsidiary of MG, MGNG is
required to supply the remaining 81% of the natural gas required to meet the
requirements of the Lone Star Contract at pre-established prices.
The fixed price received by Marketing for gas sold to Lone Star is
substantially in excess of the spot (market) price. It also exceeds the fixed
price of gas purchased from MGNG to meet the requirements of the Lone Star
Contract. As a result, Marketing has substantially locked in a gross margin
equal to the excess of the price received from Lone Star over the price paid to
MGNG with respect to the 81% of its natural gas requirement that it must
purchase. Such "locked up" gross margins are, however, subject to the supply
risk of MGNG, the credit risks of Lone Star and other contractual risks in the
Lone Star Contract.
The Castle Pipeline
The Castle Pipeline is an intrastate pipeline system located in Rusk
County, Texas, which gathers natural gas produced primarily from the Oak Hill
Field located north of Henderson, Texas for delivery to Lone Star through ten
different interconnects with a Lone Star pipeline in north Rusk County. The
Castle Pipeline is the principal means by which Marketing delivers gas to Lone
Star. Other sources of natural gas are accessible through interconnects with six
other pipelines.
The Castle Pipeline consists of 77 miles of pipeline with diameters
ranging from two to six inches and six compressor stations. The Castle Pipeline
has maximum allowable working pressures of 1040 pounds per square inch ("psi")
to 1264 psi with the exception of a low pressure gathering system which has
maximum allowable working pressure of 323 psi. The combined delivery capacities
of the components are in excess of 90 million cubic feet per day. The actual
deliveries made on the Castle Pipeline by Marketing during the periods shown
were as follows:
Twelve Months Ended September 30,
---------------------------------
1993 1994 1995
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MCF(1)....................... 21,050,592 18,208,312 19,504,735
MCFPD(2)..................... 57,673 49,886 53,438
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(1) Thousand cubic feet
(2) Average throughput per day in thousand cubic feet
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OIL AND GAS EXPLORATION AND PRODUCTION
General
The Company's oil and gas exploration and production business, conducted
through Production and Castle Exploration Company, Inc. ("CECI"), a wholly-owned
subsidiary, includes interests in approximately 450 producing oil and gas wells
located in eight states. Until June 1993, the Company also administered a number
of oil and gas partnerships.
Properties
Proved Oil and Gas Reserves
The following is a description of the Company's oil and gas reserves as
of September 30, 1995. All estimates of reserves are based upon engineering
evaluations prepared by Ryder Scott and Company and Huntley and Huntley,
independent petroleum reservoir engineers, in accordance with the requirements
of the Securities and Exchange Commission. Such estimates include only proved
reserves. The Company reports its reserves annually to the Department of Energy.
The Company's estimated reserves as of September 30, 1995 are as follows:
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Location of Reserves
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Texas Other States (2) Total
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Net MCF (1) of gas:
Proved developed producing................................. 14,402,122 6,774,647 21,176,769
Proved developed non-producing............................. 10,002,036 356,074 10,358,110
Proved undeveloped......................................... 22,287,080 2,746,260 25,033,340
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Total...................................................... 46,691,238 9,876,981 56,568,219
========== ========= ==========
Net barrels of oil:
Proved developed producing................................. 68,838 133,320 202,158
Proved developed non-producing............................. 46,070 46,070
Proved undeveloped......................................... 102,652 102,652
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Total...................................................... 217,560 133,320 350,880
========== ========== ==========
</TABLE>
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(1) Thousand cubic feet
(2) Alabama, California, Illinois, Louisiana, Mississippi, Oklahoma and
Pennsylvania
The Texas reserves were acquired on December 3, 1992 when Production
acquired majority working interests in 100 producing oil and gas wells from
ARCO.
Oil and Gas Production
The following table summarizes the net quantities of oil and gas
production of the Company for the three fiscal years ended September 30, 1995,
including production from acquired properties since the date of acquisition.
Fiscal Years Ended September 30,
--------------------------------
1995 1994 1993
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Oil -- Bbls (barrels).......... 51,000 52,000 45,000
Gas -- MCF..................... 3,721,000 3,606,000 3,472,000
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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.
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Fiscal Years Ended September 30,
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1993 1994 1995
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Average Sales Price per Barrel of Oil................................... $17.69 $16.03 $15.59
Average Sales Price per MCF of Gas...................................... $ 2.44 $ 2.02 $ 2.13
Average Production Cost per Equivalent MCF(1)........................... $ 0.71 $ 0.67 $ 0.59
</TABLE>
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(1) For purposes of equivalency of units, a barrel of oil is assumed equal to
six MCF of gas, based upon relative energy content.
Productive Wells and Acreage
The following table presents the oil and gas properties in which the
Company held an interest as of September 30, 1995. The wells and acreage owned
by the Company and its subsidiaries are located in Alabama, California,
Illinois, Louisiana, Mississippi, Oklahoma, Pennsylvania and Texas.
As of
September 30, 1995
-------------------------
Gross(2) Net (3)
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Productive Wells:(1)
Gas Wells............................... 375 189
Oil Wells............................... 75 26
Acreage:
Developed Acreage....................... 81,142 33,801
Undeveloped Acreage..................... 10,534 9,217
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(1) A "productive well" is a producing well or a well capable of production.
Sixty wells are dual wells producing oil and gas. Such wells are classified
according to the dominant mineral being produced.
(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.
Drilling Activity
The table below sets forth for the three fiscal years ended September
30, 1995 the number of gross and net productive and dry developmental wells
drilled including wells drilled on acquired properties since the dates of
acquisition. The Company did not drill any exploratory wells during these
periods.
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Fiscal Year Ended September 30,
-------------------------------
1993 1994 1995
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Productive Dry Productive Dry Productive Dry
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Developmental:
Gross.................................. 8 -- -- -- -- --
Net.................................... 0.48 -- -- -- -- --
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Sale of Partnership Administration Business
Until June 1993, the Company was in the business of oil and gas
partnership administration. As a result of depressed oil and gas prices and tax
legislation during the last nine years, the number of oil and gas partnerships
in existence and the number of oil and gas partnerships being formed have
decreased. These developments significantly limited the number of opportunities
for the Company to obtain new sources of administrative revenue. Therefore, the
Company discontinued its business of administration of oil and gas partnerships
effective as of June 1993 and sold the business to a former officer of the
Company who in November 1994 rejoined the Company as an officer.
REFINING
The Company, through its subsidiaries, owned and operated the Indian
Refinery and the Powerine Refinery. The Refineries had combined refining
(distillation) capacity of 135,500 (B/D).
Indian Refinery
Overview
The Company's subsidiary, IRLP, purchased the Indian Refinery in August
1989 and after an extensive refurbishment program, reopened it in November 1990.
IRLP operated the Indian Refinery from November 1990 through September 1995. In
September 1995, IRLP ceased operations and retired the refining assets of the
Indian Refinery.
The Indian Refinery is located on 834 acres of land in Lawrenceville,
Illinois with a capacity of 86,000 B/D. The Refinery also has a terminalling
facility located in Mt. Vernon, Indiana.
On December 12, 1995, the Company and certain of its subsidiaries closed
a Purchase and Sale Agreement with American Western whereby the Company sold
substantially all of the operating assets, including land, of the Indian
Refinery to American Western for $3 million cash and a $5 million note due upon
the earlier of American Western's completion of its second stage financing or
October 31, 1996. Concurrently, the Company sold certain precious metal catalyst
to American Western for a $1.8 million note due February 11, 1996. The note
repayment date was later extended to March 22, 1996. Further, as part of the
sale, American Western assumed all environmental liabilities related to the
Indian Refinery, all pension liabilities of IRLP, certain litigation between
IRLP and Shell Canada (see Item 3), and a transportation commitment with Mobil
Corp. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Powerine
Overview
The Company acquired the Powerine Refinery from MG in October 1993 by
acquiring the stock of Powerine.
The Powerine Refinery is located on 88 acres in Santa Fe Springs,
California and has a capacity of 49,500 B/D. In addition, Powerine owned a
terminal in Phoenix, Arizona and leased a terminal in Long Beach, California.
The Powerine Refinery was shut down in early July 1995 after several
attempts to sell the Powerine Refinery failed. On September 29, 1995, Powerine
sold the Powerine Refinery to Kenyen for $3 million cash and a note in the
principal amount of $19.76 million, which is due in three installments on April
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30, June 30 and September 30, 1996. The note bears interest at 10% and is
secured by the assets sold to Kenyen. Powerine retained the terminals, water
rights, emissions trading credits and certain other assets. In addition,
Powerine retained all on-site and off-site environmental liabilities and was
responsible for clean up of the land once the assets sold were removed.
On January 16, 1996, Powerine merged into a subsidiary of EMC. For tax
purposes the transaction is accounted for as the sale of substantially all of
Powerine's assets for $1 million cash and the assumption of all Powerine's
liabilities, including its environmental liabilities. As a result of the
transactions with Kenyen and EMC, the Company has disposed of all of its
interests in Powerine.
REGULATIONS
Since the Company has disposed of its refineries and third parties have
assumed environmental liabilities associated with the refineries, the Company's
current activities are not subject to environmental regulations that generally
pertain to refineries, e.g., the generation, treatment, storage, transportation
and disposal of hazardous wastes, the discharge of pollutants into the air and
water and other environmental laws. Nevertheless, the natural gas marketing and
transmission and oil and gas exploration and production operations of the
Company are subject to a number of local, state and federal environmental laws
and regulations. To date, compliance with such regulations by the Company's
natural gas marketing and transmission and exploration and production segments
has not resulted in material expenditures.
The Castle Pipeline is an intrastate pipeline system and is primarily
regulated by the Texas Railroad Commission (the "Railroad Commission"). Under
Texas statutes, the Railroad Commission, whose members are elected, has
authority to regulate the intrastate transportation, sale, delivery and pricing
of natural gas by intrastate pipelines in Texas, including the Castle Pipeline.
In its conservation and production regulations, the Railroad Commission has
adopted the Market Demand Rule, which provides, in general, that the production
of gas in excess of reasonable demand is prohibited, and requires that producers
tender and deliver, and gas purchasers, including pipelines, take only volumes
of gas equal to their market demand. The Railroad Commission further requires
that such purchasers must adhere to the Ratable Take Rule and take gas by
priority categories, ratably among producers, without undue discrimination, and
with high-priority gas (defined as casinghead gas, or gas from wells primarily
producing oil, and certain special allowable gas that are the last to be shut-in
during periods of reduced market demand), having greater priority than gas well
gas (defined as gas from wells primarily producing gas), notwithstanding any
contractual commitments.
The Company's activities in connection with the operation of pipelines
and other facilities for transporting natural gas are subject to environmental
regulation by federal and state authorities, including the United States
Environmental Protection Agency (the "USEPA"), the Texas Air Control Board (the
"TACB"), the Texas Water Commission (the "TWC") and the Railroad Commission.
Compliance with regulations promulgated by these various governmental
authorities increases the cost of planning, designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to water,
air and land pollution and control measures. The Company believes it is
currently in material compliance with the measures set forth by the USEPA, the
TACB, the TWC and the Railroad Commission.
All states in which the Company 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 as between owners of interests in a common reservoir. Some state regulatory
authorities also regulate the amount of oil and gas produced by assigning
allowable rates of production to each well or unit. Recently there has been a
significant increase in the amount of state regulation, including increased
bonding, plugging and operational requirements. Such increased state regulation
has resulted in, and is anticipated to continue to result in, increased legal
and compliance costs being incurred by the Company. Based on past costs, even
considering recent increases, management of the Company does not believe such
legal and compliance costs will have a material adverse effect on the financial
condition or operations of the Company.
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EMPLOYEES AND OFFICE FACILITIES
As of February 29, 1996, the Company, through its subsidiaries, employed
approximately 25 personnel.
The Company owns certain office facilities as follows:
Office Location Function
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Henderson, TX Oil and Gas Exploration and Production Office
Henderson, TX Natural Gas Pipeline and Marketing Office
The Company also leases certain offices as follows:
Office Location Function
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Radnor, PA Corporate Headquarters
Mt. Pleasant, PA Oil and Gas Production Office
Pittsburgh, PA Drilling and Exploration Office
Tulsa, OK Oil and Gas Production Office
Calgary, Canada Marketing Office
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ITEM 3. LEGAL PROCEEDINGS
Environmental Liabilities - Refining
Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries were potentially liable for
environmental costs related to air emissions, ground and water contamination,
hazardous waste disposal and third party claims related to the foregoing.
In July 1995 operations of the Company's Powerine Refinery ceased. On
September 29, 1995, Powerine sold substantially all the assets of the Powerine
Refinery to Kenyen. Kenyen has advised the Company that it plans to dismantle
the Powerine Refinery and ship it to India. In conjunction with that sale,
Kenyen assumed liability for asbestos abatement and sludge removal.
Substantially all of the remaining assets of Powerine were acquired by EMC for
$1 million cash and the assumption of substantially all of Powerine's
liabilities, including all of its environmental liabilities. At September 30,
1995, Powerine had a $23.6 million reserve for environmental liabilities. The
reserve did not change significantly through January 16, 1996, the date of
Powerine's transaction with EMC.
In September 1995, operations ceased at the Company's other refinery,
the Indian Refinery. On December 12, 1995, IRLP sold the Indian Refinery to
American Western for $8 million. In addition, American Western assumed all
environmental liabilities related to the Indian Refinery. IRLP's management
estimated the gross amount of such environmental liabilities to be approximately
$12.5 million. Because the Company has terminated and discontinued its refining
operations and as a result of the transactions with EMC and American Western,
the discontinued net refining assets, including environmental liabilities, have
been reflected in the September 30, 1995 consolidated balance sheet at estimated
realizable value.
Although the environmental liabilities related to both of the Company's
refineries have been assumed by others, there can be no assurance that the
Company or one of its subsidiaries will not be sued for matters related to
environmental liabilities of the refineries. All three of the companies to which
the refining assets and refining subsidiary stock were sold are thinly
capitalized and without significant financial resources. Two are currently
seeking to raise financing for restarting a refinery or for payment of notes
related to the purchase of one refinery. If any of these companies fails in such
endeavors and cannot pay such notes or environmental liabilities, it is possible
that the Company or IRLP (still a subsidiary of the Company) would be a party in
related legal actions. Although the Company does not believe it has any
liability with respect to such environmental liabilities, a court of competent
jurisdiction may find otherwise and the Company may be required to fund portions
of such liabilities. In recent years, government and other plaintiffs have often
sought redress for environmental damage from the party most capable of payment
without regard to responsibility and fault. Whether or not the Company is
ultimately held liable in such a circumstance, should litigation involving the
Company and/or IRLP occur, the Company would incur substantial legal fees and
experience the diversion of management resources from other operations.
General
MGNG
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to
do so based on breaches of other agreements by MG and its affiliates. MGNG
disregarded IRLP's termination notice and sent IRLP a termination notice
alleging IRLP was the defaulting party and claiming approximately $1.2 million
of losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's
assignee, filed a complaint in Delaware state court, claiming $1.356 million
plus interest under the Swap Agreement. IRLP has answered the complaint. The
Company's management believes that IRLP has good defenses to that claim, expects
to prevail and expects to recover its $707,000 receivable.
Stockholder Litigation
In January 1994, the Company was served with one complaint filed in the
United States District Court for the Central District of California (the
"District Court") and five complaints filed in the United States District Court
for the Eastern District of Pennsylvania, each of which alleged certain
violations of federal securities laws relating to developments regarding MG and
its affiliates. The lawsuit filed in California, entitled Leslie Susser and
Robert Susser v. Castle Energy Corporation, et. al., and the lawsuits filed in
Philadelphia, which were consolidated as a single action under the title In re
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Castle Energy Corp. Securities Litigation (the "Pennsylvania Action"), were
filed as class action complaints on behalf of either all persons who purchased
the Company's Common Stock in its November 1993 public offering or all persons
who purchased the Company's Common Stock during various periods from February 3,
1993 through January 14, 1994. The complaints sought unquantified damages and
other relief from the Company, MG and certain of the Company's officers and
directors. On June 7, 1994, the Judicial Panel on Multidistrict Litigation
ordered the Pennsylvania Action to be transferred to the District Court for
coordinated or consolidated pre-trial procedures under the caption In re Castle
Energy Corporation Securities Litigation (the "Stockholder Litigation"). The
District Court certified a class of persons who purchased the Company's Stock
during the period from February 3, 1993 through and including January 14, 1994.
In October 1994, the parties reached a settlement of the claims in the
Stockholder Litigation, including certain added derivative claims. On December
6, 1994, after notice to class members and the Company's stockholders, the
District Court entered an order approving the settlement (the "Settlement
Order"), including approval of: (i) a payment to the plaintiff class and its
attorneys of $15 million, of which the Company's portion will not exceed
$500,000 after contribution by MG and application of insurance proceeds; and
(ii) the MG Settlement as fair and reasonable to the Company and its
stockholders. On the same date the District Court issued orders dismissing the
Stockholder Litigation (including the Pennsylvania Action) with prejudice. No
appeals were filed challenging the Settlement Order and, accordingly, the order
became final on January 5, 1995.
On December 11, 1995, the Company received a $2.725 million refund from
the payment to the plaintiff class, representing unclaimed funds that were to
revert to the Company pursuant to the Settlement Order. Approximately $2.275
million was paid to class members and the remaining $10 million to attorneys.
Securities and Exchange Commission Investigation
On April 17, 1994, the Securities and Exchange Commission (the "SEC")
entered an Order of Investigation relating to the Company's November 1993 public
offering. Subsequently, the Company received a document subpoena, pursuant to
which the Company has produced documents to the SEC. On May 31, 1994, the
Company's former general counsel met informally with the SEC staff at the
Philadelphia District office. The SEC has taken testimony from certain current
and former directors of the Company. To date, the Company has not been informed
by the investigators of any claims of wrongdoing against the Company or its
directors and officers.
Grand Jury Investigation, New York County
On February 2, 1994, the Company received a subpoena for documents from
a grand jury in New York County, New York. The requested documents appear to
relate to the Company's 1993 public offering and MG's alleged financial
difficulties. The Company has produced documents pursuant to that subpoena. On
March 25, 1994, the Company's former general counsel and the Company's New York
counsel met informally with Assistant District Attorneys of New York County to
discuss the investigation. Other parties or their attorneys, including MG, have
also spoken with the Assistant District Attorneys. To date, the Company has not
been informed by the investigators of any claims of wrongdoing against the
Company or its directors and officers.
Mechanics Liens - IRLP
A total of approximately $3.7 million of mechanics liens has been filed
by vendors against IRLP. Of this amount, approximately $2.0 million has been
settled by IRLP using proceeds from the $3 million cash payment from American
Western. IRLP anticipates paying the remaining amount with the proceeds of the
American Western note (see footnote 3 to the consolidated financial statements
included in Item 8).
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it to
MGTFC, including $10.8 million of disputed amounts (the "Disputed Amount"). On
the same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10 million.
-9-
<PAGE>
c. Powerine transferred its claim with respect to the Disputed Amount to
the Company.
d. The claim with respect to the Disputed Amount was agreed to be
submitted to binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10 million loan to the Company against the $10
million note it issued to the Company as part of the MG Settlement,
to the extent the arbitrator decides the claim with respect to the
Disputed Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled and MG will still
owe the Company its $10 million note (due October 14, 1997). If the arbitrator
settles the Disputed Amount entirely in MG's favor, the Company's note from MG
will be discharged. In such case the Company's future earnings will also be
adversely impacted since the Company has not recorded any reserve against the
note.
On September 8, 1995, the Company filed its Statement of Claim and
Memorandum. On December 6, 1995, MG filed its Notice of Defense and Response to
Claimant's Statement of Claim and Memorandum. The Company filed its reply brief
on February 14, 1996 and the parties are proceeding with discovery as to the
amount of damages.
In January 1996, MG did not pay interest on the $10,000,000 note, when
such interest was due. As a result, the entire note is due to be paid to the
escrow account for the Powerine Arbitration. The Company has demanded that MG
pay the entire note.
Long-Term Supply Agreement
In 1993, IRLP entered into a Long-Term Supply Agreement (the "LTSA")
with Shell Canada Limited and Salmon Resources Ltd. (collectively "Shell") for
the supply of Caroline Condensate feedstock to the Indian Refinery. MGRM agreed
to be the alternate purchaser under the LTSA in the event IRLP should fail to
perform. On December 23, 1994, Shell filed suit in the United States District
Court for the Northern District of Illinois against IRLP and MGRM (the "Shell
Litigation"). The complaint alleged that MGRM failed to provide Shell with
adequate assurances, pursuant to a request under the Illinois Commercial Code,
concerning its role as "alternate purchaser" under the LTSA, and that as a
result, MGRM repudiated the LTSA pursuant to provisions of the Illinois
Commercial Code. The complaint further alleged that the LTSA should be
terminated because its purpose has been frustrated and the performance has
become impossible.
On October 2, 1995, Shell unilaterally terminated its performance under
the LTSA and ceased delivering Caroline Condensate to the Indian Refinery. On
January 16, 1996, Shell filed an amended complaint, which adds a claim for
$10,000,000 in damages based upon alleged undercharges and other breaches of the
LTSA. Management believes the claim of Shell is without merit.
On December 12, 1995, IRLP sold the Indian Refinery to American
Western. As part of the sale, American Western assumed all liabilities and
expenses associated with the LTSA litigation. It is currently pursuing this
litigation against Shell.
-10-
<PAGE>
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 1995.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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, 1995.
<TABLE>
<CAPTION>
1994 1995
------------------------- -------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter (December 31).................................. $25.00 $11.00 $16.00 $11.25
Second Quarter (March 31).................................... 14.50 7.25 14.25 8.00
Third Quarter (June 30)...................................... 15.00 9.75 10.75 7.00
Fourth Quarter (September 30)................................ 19.00 11.50 11.00 8.00
</TABLE>
The final sale of the Company's Common Stock as reported by the NNM on
February 29, 1996 was $7.875.
Dividends:
The Company has not adopted a formal dividend policy and has not
declared a dividend since 1989. The loan agreements in place with subsidiaries
of the Company restrict the subsidiaries from distributing cash to the Company
until the debt obligations are satisfied. Accordingly, the subsidiaries' profits
are generally not available for dividends.
Approximate Number of Holders of Common Stock
As of February 29, 1996, the Company's Common Stock was held by
approximately 2,000 stockholders.
-12-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
During the Company's five fiscal years ended September 30, 1995, the
Company consummated a number of transactions affecting the comparability of the
financial information set forth below. In August 1989, the Company acquired the
Indian Refinery. From April 1990 until November 1990, the Company performed
refurbishment work on the Indian Refinery and recommenced operations in November
1990. In February 1992, the Company entered into a product offtake agreement
with MGR&M ("Indian Offtake Agreement") which was restructured and extended in
May 1993. In December 1992, the Company acquired certain assets from ARCO. In
June 1993, the Company sold its business of administration of oil and gas
partnerships. In October 1993, the Company acquired the Powerine Refinery.
During 1995, the Company reached a settlement with MG and its affiliates which
would affect the results of operations for all future periods. In September
1995, the Company discontinued its refining operations. See Item 7 -
"Management's Discussion and Analysis of Financial Condition" and Note 3 to the
Company's Consolidated Financial Statements included in Item 8, to this Form
10-K.
The following selected financial data has been derived from the
Consolidated Financial Statements of the Company for each of the five years
ended September 30, 1995 and all such income statement information has been
reclassified to give effect to the discontinuance of the refining operations.
The information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Item 8. Financial Statements and
Financial Statement Schedules and Item 7. "Management's Discussion and Analysis
of Financial Condition."
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,
----------------------------------------
(in Thousands, except per share amounts)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Natural gas marketing and transmission................ $70,402 $61,259 $ 56,676 - -
Exploration and production............................ 9,197 8,552 10,124 $ 5,165 $ 7,709
Gross Margin:
Natural gas marketing and transmission................ 30,242 24,199 22,200 - -
Exploration and production............................ 6,831 5,923 7,469 3,372 5,379
Earnings (loss) before interest, taxes, depreciation, and
amortization:
Natural gas marketing and transmission................ 28,252 22,003 20,361 - -
Exploration and production............................ 5,761 4,494 5,940 2,181 4,189
Corporate general and administrative expenses............. (4,995) (5,499) (2,191) (1,706) (1,707)
Depreciation, depletion and amortization.................. (14,155) (13,452) (12,191) (1,453) (1,499)
Interest expense.......................................... (4,046) (9,233) (9,117) (2,919) (3,155)
Interest income and other income (expense)................ 966 950 85 (476) 380
---------- ----------- ------------ ----------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change in
accounting............................................ 11,783 (737) 2,887 (4,373) (1,792)
Provision for (benefit of) income taxes related to
continuing operations................................. 37,823 (17,077) (44,081) 81 (17)
---------- ----------- ------------ ----------- ----------
Income (loss) from continuing operations (26,040) 16,340 46,968 (4,454) (1,775)
Income (loss) from discontinued refining operations
net of applicable income taxes........................ 40,937 22,577 12,355 (47,815) (97,309)
---------- ----------- ------------ ----------- ----------
Income (loss) before cumulative effect of a change in
accounting principle.................................. 14,897 38,917 59,323 (52,269) (99,084)
Cumulative effect on prior years of change in
accounting principle - adoption of FAS 109............ 8,514
---------- ----------- ------------ ----------- ----------
Net income (loss)......................................... $14,897 $38,917 $67,837 ($52,269) ($99,084)
========== =========== ============ =========== ==========
Net income (loss) per share (fully diluted):
Continuing operations................................. ($ 3.84) $ 1.44 $ 6.20 ($ 0.35) ($ 0.19)
Discontinued operations............................... 6.04 1.99 1.64 (3.76) (10.41)
Cumulative effect of a change in accounting........... 1.12
---------- ----------- ------------ ----------- ----------
$ 2.20 $ 3.43 $ 8.96 ($ 4.11) ($ 10.60)
========== =========== ============ =========== ==========
</TABLE>
(continued on next page)
-13-
<PAGE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------
(in Thousands)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of Period):
Working capital (deficit).............................. ($12,474) ($ 22,769) ($ 47,462) $ 6,451 ($ 88,952)
Property, plant and equipment, net, including oil
and gas properties.................................. 40,406 339,876 150,299 85,420 82,818
Total assets........................................... 116,904 646,491 392,738 167,873 110,732
Long-term debt, including current maturities........... 35,946 394,123 199,020 202,860 127,364
Stockholders' equity (deficit)......................... 41,637 37,920 (9,387) (89,124) (37,749)
</TABLE>
(continued from previous page)
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Until August 1989, the Company was involved in only one segment of the
petroleum industry - oil and gas exploration and production, including the
administration of related oil and gas partnerships. At that time the Company
made a material investment in the refining segment of the petroleum industry by
acquiring the Indian Refinery in August 1989. The Indian Refinery commenced
operation in November 1990 and, as a result, refining operations first impacted
the Company in the fiscal year ended September 30, 1991. On December 3, 1992,
the Company acquired from ARCO the Lone Star Contract, a 77-mile intrastate gas
pipeline located in Rusk County, Texas and majority working interests in 100
producing oil and gas wells for an aggregate purchase price of approximately
$103.7 million including liabilities assumed and transaction costs. As a result
of this acquisition, the Company entered a third segment of the oil and gas
business - natural gas transmission and marketing.
In June 1993, the Company sold its business of administration of oil and
gas partnerships to a former officer of the Company. The former officer rejoined
the Company in November 1994. Nevertheless, through its ownership of
non-partnership oil and gas properties, including those acquired from ARCO, the
Company remained active in the oil and gas exploration and production segment of
the oil and gas business.
As of October 1, 1993, the Company acquired Powerine, which owned a
49,500 B/D refinery in Santa Fe Springs, California. The results of operations
of Powerine are included in the refining segment commencing October 1, 1993. The
acquisition of Powerine increased the dominance of refining in the Company's
consolidated operations.
Most of the Company's acquisitions were financed by MG, which was also
the principal shareholder of the Company until September 1994. Many of the
Company's transactions were with MG or its subsidiaries (see footnote 21 to the
consolidated financial statements included in this Form 10-K). In December 1993,
the financial press reported that MG AG and MG had incurred substantial losses
related to hedging activities. Thereafter, MG sought to restructure or terminate
its relationships with the Company and its subsidiaries. In August 1994, the
Company entered into the MG Settlement. The MG Settlement closed on October 14,
1994 (see footnote 3 to the consolidated financial statements included in this
Form 10-K). As a result of the MG Settlement, the Company realized a $391
million gain and MG returned to the Company all of the Company's stock that it
owned.
The Company began to explore its options for dealing with its refining
operations before and during the negotiation of the MG Settlement. The Company
considered a number of alternatives, ranging from continuing refining operations
on substantially the same basis as prior to the MG Settlement, but obtaining new
working capital financing and a new customer base, to selling or closing the
refineries. The Company believed, however, that it would need to raise
substantial new equity for the payment of its income taxes, in addition to
raising the working capital financing for the refineries, if it decided to
continue refinery operations. Further, continuing the refinery operations would
require the Company to add significant marketing personnel, expertise and
expense. On the other hand, closing the refineries would result in substantial
shut-down costs, including severance obligations to employees and potential
environmental clean-up costs, although it would allow the Company to write-off
the costs of its refineries to substantially reduce its taxes. Based upon these
factors, the Company sought to sell its refining operations. As of December 31,
1994, the Company had written down its refining assets to their estimated net
realizable values and booked accruals for anticipated closing costs. The first
quarter impairment reserve of $345,008,000 was revised in the third and fourth
quarters based on changes in facts and circumstances. For the year ended
September 30, 1995, the Company recorded impairment reserves of $323,078,000.
During the period October 14, 1994 to September 30, 1995, the Company
sought to sell both Refineries. An initial attempt to sell both refineries and
then additional attempts to sell one refinery to management failed because of
the lack of financing and market conditions. The Company believes that the
filing of a lawsuit by Shell Canada Limited ("Shell") against IRLP during
financing negotiations contributed to this failure (see Item 3 to this Form
10-K). (Liabilities, if any, resulting from the lawsuit were later assumed by
American Western.) During the spring, summer and fall of 1995, the Company
sought to sell the refineries separately. Although several agreements were
negotiated, the potential purchasers were not able to raise the financing
required. In September 1995 an effort to sell the Indian Refinery to CORE
Refining Corporation, a company formed by William Sudhaus, an executive officer
and director of the Company ("CORE"), failed when CORE's investment banker
-15-
<PAGE>
failed to perform in raising a substantial amount of debt. As a result of
continued failure to sell the refineries, the Company caused operations at each
refinery to cease. Operations at the Powerine Refinery ceased in July 1995 and
operations at the Indian Refinery ceased in September 1995.
On September 29, 1995, the Company sold the Powerine Refinery to Kenyen.
Kenyen has advised the Company that it plans to dismantle the refinery and ship
it to India. On January 16, 1996, Powerine merged into a subsidiary of EMC. As a
result of the transactions with Kenyen and EMC, the Company no longer owns any
interest in Powerine.
On September 30, 1995, the Indian Refinery ceased operations and retired
its assets. On December 12, 1995, IRLP sold the Indian Refinery to American
Western, a wholly-owned subsidiary of Gadgil for $8 million. $3 million was paid
in cash; the remaining $5 million (represented by a note) is payable the earlier
of a) Gadgil's raising of financing to restart the Refinery b) October 31, 1996.
The note is secured by the refining plant. In addition, American Western assumed
certain liabilities of IRLP, including all environmental liabilities. IRLP,
however, remained responsible for liabilities not assumed by American Western -
primarily trade payables. IRLP intends to use the $5 million note proceeds to
pay the trade payables.
As a result of the sales to Kenyen, EMC and American Western, the
Company has divested its refining operations. Nevertheless, should Kenyen, EMC,
and/or American Western fail in their efforts with respect to the refineries
they purchased or to pay notes due to the Company, it is possible that the
Company and/or its subsidiaries could be included in efforts by vendors to
collect trade payables and/or by environmental authorities in efforts to pursue
environmental claims. All of the aforementioned entities have limited capital.
See footnote 3 to the consolidated statements for further information
concerning the disposition of the refineries.
As a result of the foregoing, the Company discontinued its refining
operations by September 30, 1995 and such refining operations are accounted for
currently and retroactively as discontinued operations. Accordingly, discussion
of results of operations has been confined to results of continuing operations -
exploration and production and natural gas marketing and transmission.
RESULTS OF OPERATIONS
($ "000's" Omitted)
- --------------------------------------------------------------------------------
Fiscal 1995 vs Fiscal 1994
Revenues
Gas sales from natural gas marketing increased $9,174 or 15% from fiscal
1994 to fiscal 1995. Under the Company's long-term gas sale contract with Lone
Star, the price received for gas is essentially fixed through May 31, 1999. The
variance in gas sales, therefore, is almost entirely attributable to the volumes
of gas delivered. Although the volumes sold to Lone Star annually are
essentially fixed (the Lone Star Contract has a take-or-pay provision), the Lone
Star contract year is from February 1 to January 31 whereas the Company's fiscal
year is from October 1 to September 30. Furthermore, although the volumes to be
taken by Lone Star in a given contract year are fixed, there is no provision
requiring fixed monthly or daily volumes and deliveries accordingly vary with
Lone Star's seasonal and peak demands. Such variances have been significant. As
a result, Lone Star deliveries, although fixed for a contract year, may be
skewed and not proportional for the Company's fiscal year. Lone Star deliveries
and sales for 1995 approximated those which would have occurred if daily takes
under the Lone Star Contract had been fixed and equal. Except for $84, all
fiscal 1995 sales by the natural gas marketing and transmission segment were to
Lone Star.
The Lone Star Contract provides for a 8.6% reduction in annual
deliveries commencing February 1, 1996. Assuming average monthly deliveries for
the contract year ended January 31, 1997, this would result in a decrease in gas
sales of approximately $4,007 in fiscal 1996. For the Company, the required gas
volume decreases another 1.5% for the contract year beginning February 1, 1997
and remains constant thereafter. As a result , the Company expects average sales
under the Lone Star Contract to be 8.6% - 10% less in each of the two fiscal
years ending September 30, 1998 when compared to fiscal 1995.
Exploration and production revenues increased $645 or 7.5% from fiscal
1994. The increase is primarily attributable to increased gas prices. Production
for fiscal 1994 consisted of 3,918,000 equivalent mcf (consisting of 52,000
barrels of crude and 3,606,000 mcf of gas) versus 4,027,000 equivalent mcf
-16-
<PAGE>
(consisting of 51,000 barrels of crude and 3,721,000 mcf of gas) for fiscal
1995. The net increase in equivalent mcf was 109,000 equivalent mcf or 2.8%.
Average gas prices increased $.11 per mcf or 5.4% from $2.02 in fiscal 1994 to
$2.13 in fiscal 1995. The increase in production consisted of two factors: an
increase resulting from the purchase of the production payment from ARCO in
October 1994 (see footnote 4 to the consolidated financial statements) offset by
a similar decline in production from the Company's other depleting wells. With
the exception of the ARCO production payment purchase, only $199 was invested in
oil and gas properties in fiscal 1995.
Expenses
Gas purchases increased $3,131 or 8.5% from fiscal 1994. In fiscal 1994
gas purchases constituted 60.5% of gas sales versus 57% of gas sales in fiscal
1995. The decrease in the gas purchase cost percentage is primarily attributable
to the elimination of deferred gas purchase cost. In fiscal 1994, a deferred gas
purchase cost of $2,400 was included in gas purchase cost. This cost represented
additional deferred gas purchase costs that the Company expected to pay after
the GECC Loan was repaid. As a result of the MG Settlement on October 14, 1994
the deferred gas purchase obligation was discharged and did not apply to most of
fiscal 1995.
Operating costs of the natural gas transmission segment increased $69 or
6.1% from 1994 to 1995. This increase consists primarily of wage increases given
to pipeline personnel.
General and administrative expenses applicable to natural gas marketing
and transmission decreased $306 or 28.1% from fiscal 1994 to fiscal 1995. The
decrease occurred primarily because of a decrease in insurance and legal costs.
Operating (oil and gas production) expenses in the exploration and
production segment decreased $263 or 10% from fiscal 1994 to fiscal 1995. The
decrease results primarily from decreased operating costs applicable to
non-operated wells and significantly decreased property taxes.
General and administrative costs applicable to exploration and
production decreased $359 or 25.1% from 1994 to 1995. The decrease results
primarily from decreased insurance expense, administrative fees and legal costs.
Interest expense decreased $5,187 or 56.2% from fiscal 1994 to fiscal
1995. The decrease results entirely from the decrease in the GECC Loan and the
discharge of a $9.5 million subordinated loan due to MGTFC on October 14, 1994
as part of the MG Settlement.
The tax provision allocation applicable to continuing operations has
been determined pursuant to "Financial Accounting Standards Number 109 -
Accounting for Income Taxes" ("FAS 109"). The management of the Company believes
that the intraperiod tax provision allocation between continuing and
discontinued operations is misleading because the tax rate applicable to
continuing operations does not approximate the tax rate expected by the Company
in future years.
Fiscal 1994 vs Fiscal 1993
Revenues
Revenues from natural gas marketing increased by $4,583 or 8.1% for the
year ended September 30, 1994, principally as a result of the Company's
acquisition of the Lone Star Contract from ARCO on December 3, 1992. The
increased sales for the additional two months in fiscal 1994 were slightly
offset by decreased average daily quantities sold to Lone Star during the year
ended September 30, 1994. The average daily takes of gas under the Lone Star
Contract decreased 14% in 1994. The decrease in daily takes is attributable to
small decreases in the annual contractual volumes under the Lone Star Contract
and seasonal requirements of Lone Star within a contract year.
Exploration and production revenues decreased $1,572 or 15.5% for the
year ended September 30, 1994 as compared to the prior year primarily as a
result of the June 30, 1993 sale of certain exploration and production
properties, as well as the general depletion of other Company wells.
Furthermore, the Company drilled no new wells in fiscal 1994 and made minimal
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<PAGE>
capital investments to enhance existing production. This was partially offset by
the addition of 100 working oil and gas wells on December 3, 1992.
Operating Income and Expenses
Natural gas marketing earned operating income of approximately $10.6
million in fiscal 1994 versus $10.9 million in fiscal 1993. The decrease is
primarily attributable to the decreased average daily quantities sold to Lone
Star which was offset by an increase attributable to twelve months of operations
in 1994 as compared with ten months in 1993.
Operating income for the exploration and production operations was
approximately $2.4 million in 1994 as compared with $3.2 million in fiscal 1993.
The decrease results from the sale of certain properties in June 1993 and the
loss of administrative revenues as a result of the sale of the Company's
partnership management business in June 1993. This is partially offset by the
addition of 100 working oil and gas wells on December 3, 1992.
Corporate general and administrative expenses increased $3.3 million
over the corresponding period in 1993. This increase is primarily attributable
to legal fees associated with defending the Stockholder Litigation and related
matters.
Other Expenses
Interest expense increased $116 or 1.3% from fiscal 1993. The net
increase is the result of two offsetting factors. Interest expense decreased
because the loan principal of the GECC Loan and a subordinated loan to MGTFC
decreased in 1994. Interest expense increased in 1994 because the loans, which
were used to finance the acquisition of the ARCO assets, were not made until
December 1992 hence such loans were outstanding for less than a whole year in
fiscal 1993.
Income Taxes
The Company allocated the 1994 tax provision between continuing and
discontinued operations retroactively pursuant to FAS 109. The Company believes
such allocation is misleading for the reason noted above.
Fiscal 1993 vs Fiscal 1992
Revenues
Revenues from natural gas marketing to Lone Star aggregated
approximately $56,600 for the period from December 3, 1992, the date the
natural gas marketing assets were acquired, to September 30, 1993. Lone Star's
gas purchases in the ten month period ending September 30, 1993 approximated
66.3% of the contract volume required to be taken by Lone Star for the contract
year ended January 31, 1994.
Exploration and production revenues during fiscal 1993 increased
approximately $5,000, or 96%, because of the production related to the
purchase of majority working interests in 100 producing oil and gas wells from
ARCO on December 3, 1992. If the producing wells had not been acquired,
exploration and production revenues would have decreased approximately $1,400.
Operating Income and Expenses
Natural gas marketing had operating income of approximately $10,900
for the fiscal year 1993. Such operating income was derived from ten months
of operations.
Operating income of exploration and production was approximately $3,200
for the fiscal year ended September 30, 1993 compared to operating income of
$700 for fiscal year 1992. This increase is due to the addition of majority
working interests in 100 wells on December 3, 1992.
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<PAGE>
Income Taxes
The Company allocated the 1993 provision between continuing and
discontinued operations retroactively pursuant to FAS 109. The Company believes
such allocation is misleading for the reason noted above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995
Subsequent to September 30, 1995, the Company sold the Indian Refinery
to American Western, the Powerine Refinery to Kenyen, and merged Powerine into a
subsidiary of EMC. As a result its financial condition changed significantly.
The discussion of liquidity and capital resources is, accordingly, focused on
the Company's financial condition as of February 29, 1996.
As of February 29, 1996
As noted previously, the Company completed the following material
transactions between September 30, 1995 and February 29, 1996:
a. IRLP sold the Indian Refinery to American Western on December 12,
1995 for $8,000. In addition, American Western assumed all of IRLP's
environmental liabilities.
b. On January 16, 1996, Powerine merged into a subsidiary of EMC.
As a result of the American Western, Kenyen and EMC transactions, the
Company had disposed of all of its refining assets. In the case of the Indian
Refinery the purchaser also assumed all pension and environmental liabilities of
IRLP. Nevertheless, IRLP remains liable for vendor payables, unpaid severance
costs and other accrued costs which approximate $7,150 million at February 29,
1996. IRLP anticipates settling these liabilities with the proceeds of the
American Western note. In addition, the Company is liable for any shortfall in
the liquidation of a revolving credit facility of IRLP with a major financial
institution ("Bankers Trust Replacement Credit Facility") by virtue of pledging
its exploration and production collateral. At February 29, 1996, the amount due
to Bankers Trust was $4,540. Most of the inventory collateral securing the
Replacement Credit Facility has been liquidated but approximately $800 of
receivables and $1,803 from the sale of platinum to American Western remain to
be collected. As a result, the Company expects the shortfall to approximate
$2,000.
In the case of Powerine all of Powerine's liabilities, including all
environmental liabilities, have been assumed as a result of the EMC transaction.
Powerine's refining assets were previously sold to Kenyen. A description of both
transactions is found in footnote 3 to the consolidated financial statements.
As a result of the foregoing, the Company's expected cash obligations
and cash resources from March 1, 1996 to September 30, 1996, the Company's next
fiscal year end, are as follows:
-19-
<PAGE>
<TABLE>
<CAPTION>
Dedicated
to
GECC Loan Not Dedicated Total
--------- ------------- -----
<S> <C> <C> <C>
Cash Resources:
Cash on hand............................................ $2,000 $ 2,000
Cash flow - natural gas marketing...................... $12,450 12,450
Cash flow - exploration and production................. 2,625 1,750 4,375
Interest - MG Note and other........................... 1,000 1,000
-------- ------- ---------
15,075 4,750 19,825
-------- ------- --------
Cash Obligations:-
Repayment of long-term debt:
GECC Loan......................................... 15,075 (1) 15,075
Loan from former stockholder...................... 1,250 1,250
Loan from stockholder............................. 125 125
Repayment of Replacement Credit Facility shortfall..... 2,000 2,000
Repayment of officer severance and other
obligations related to discontinued refining
operations........................................ 2,500 2,500
Corporate general and administrative expenses..... 1,750 1,750
------- ------- --------
15,075 7,625 22,700
------- ------- -------
Excess Cash (Obligations)................................. -- ($2,875) ($ 2,875)
======= ======= =======
</TABLE>
(1) The required repayment of the GECC Loan is $6,706 but all cash flow,
including amounts in excess of $6,706 are dedicated to repayment. The GECC
Loan had been reduced to $22,109 by February 29, 1996 and the Company
expects complete repayment not later than January 31, 1997.
Although the Company has reduced the GECC Loan approximately $12,000
below the minimum required principal, essentially all cash flow from the oil and
gas wells, pipeline and gas contracts purchased from ARCO are dedicated to the
GECC Loan and cannot be used for other purposes. As a result the Company faces a
$2,875 cash flow shortfall. Accordingly, on March 14, 1996, the Company entered
into a $3,800 credit commitment with a financial institution. Funds borrowed
will be secured by the Company's exploration and production assets. Such
financing allows the Company to meet the projected deficit of $2,875 until the
GECC Loan is repaid. Such repayment is expected in January 1997. At such time,
the Company would receive the cash flow now dedicated to repayment of the GECC
Loan - approximately $24,000 annually. The Company anticipates closing the new
credit facility by April 1, 1996. If, for any reason, the Company is unable to
close the new credit facility, the Company believes that it could raise the
required capital by obtaining a $5,000 credit facility with another financial
institution based upon its exploration and production collateral or by selling
certain of its exploration and production assets - if needed. The Company also
believes that it could obtain financing by selling its Lone Star Contract or
borrowing from an energy lender based upon the remaining value in such contract.
Although the Company anticipates that it will be able to obtain
financing based upon the fair market value of its gas contracts and exploration
and production assets, there can be no assurance that such financing will be
obtained or that it will be obtained in a timely manner. Furthermore, although
the Company has exited the refining business, it is still subject to certain
material risks related to the refinery segment as follows:
a. Kenyen, American Western and EMC are all small, thinly capitalized
companies. If any or all of them fail in their endeavors to restart
or transport either of the refineries, interested parties could seek
redress from the Company for vendor or environmental liabilities. In
the past government and other plaintiffs have often named the most
financially capable parties in such cases regardless of the existence
or extent of actual liability. Although the Company's management does
not believe the Company would ultimately be held liable, there can be
no assurance such will be the case. Even if the Company were to
prevail in such litigation, the related legal costs and distraction
of the Company's management resources from continuing operations
could be significant.
-20-
<PAGE>
b. In the case of the Indian Refinery transaction, IRLP remains
responsible for its liabilities to the extent such liabilities were
not assumed by the purchaser, American Western. Such liabilities are
approximately $7,150 at February 29, 1996. If American Western does
not pay the $5,000 note, IRLP's only recourse is to foreclose on its
collateral, the Indian Refinery. It would then have to sell the
Refinery in order to use the proceeds to pay vendors. In fiscal 1995,
the Company was unable to sell the Indian Refinery. Moreover, claims
by environmental authorities could also be made and could supersede
those of vendors. If such were the case, the Company could decide to
put IRLP into a liquidation proceeding. Although the Company does not
expect any additional significant cash outlays for the Indian
Refinery and believes such outlays would not legally be required,
attempts may be made to impose such liabilities on the Company.
On March 5, 1996, the Company engaged an investment banking firm to
explore strategic alternatives to enhance stockholder value and to act as the
Company's exclusive advisor. The alternatives that may be recommended include
the sale of assets, the sale of the Company, a merger with or joint venture with
another Company or other restructuring measures. If such is the case, future
operations of the Company may be different from that herein contemplated.
INFLATION AND CHANGING PRICES
Natural Gas Marketing and Transmission
The Company's gas sales contract with Lone Star is essentially a fixed
price contract. It continues through May 1999. The Company's gas supply contract
is also a fixed price contract. The result is that the Company's gross margin is
essentially "locked in" and does not increase with inflation. Although there are
some operating costs applicable to the natural gas marketing and pipeline
transmission segment, which tend to increase with inflation, they are minor and
inflation of such costs without concomitant inflation in revenues does not
significantly impact operating profits.
Exploration and Production
Oil and gas sales are determined by markets locally and worldwide and
often move inversely to inflation. Whereas operating expenses related to oil and
gas sales may be expected to parallel inflation, such costs have often tended to
move more in response to oil and gas sales prices than in response to inflation.
General
Since the Company currently has virtually no variable rate debt, it is
not sensitive to fluctuations in interest rates.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has released several
pronouncements that are not effective until future years. The Company believes
that such pronouncements, when effective, will not materially affect the
Company's financial condition or results of operations.
RISK FACTORS
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this section of Item 7 to this Form 10-K to do so. The Company
cautions readers that the following important risk factors could affect the
Company's future results of operations and financial condition and could cause
the Company's actual future results of operations and financial condition to
differ materially from those expressed in forward looking statements made by or
on behalf of the Company.
Refinery Matters
Although the Company has disposed of its two refineries, the Company's
future results of operations and cash flow could be adversely affected by
liabilities related to such refineries if the purchasers are unable to satisfy
such liabilities as discussed above. In addition, one purchaser is obligated to
the Company for an aggregate of $6,803 in notes, which may not be paid if such
purchaser is unable to raise financing to restart the refineries. See "Liquidity
and Capital Resources," above and Item 1 - "Business and Properties - Refining"
and Item 3. "Legal Proceedings."
-21-
<PAGE>
Supply Risk - MGNG Supply Contract
Approximately 84% of the gas delivered to Lone Star pursuant to the Lone
Star Contract is provided by MGNG. The Lone Star Contract expires on May 31,
1999. MGNG is a wholly-owned subsidiary of MG, which, in turn, is indirectly
owned by MG AG. If spot gas prices increase significantly and MGNG has not
hedged its future commitment to supply gas to the Company or if MGNG experiences
financial problems, MGNG may be unable to meet its gas supply commitments to the
Company. If MGNG does not fulfill its gas supply commitment to the Company, the
Company may not be able to fulfill its gas delivery commitment to Lone Star
which would adversely impact the Company's results of operations and cash flow.
Under such circumstances the Company may not be able to recover lost profits and
cash flow from MGNG despite provisions providing for such recovery.
Credit Risk - Lone Star
At the current time, virtually all of the Company's gas marketing
volumes and approximately 69% of the Company's own gas production is sold to a
single customer, Lone Star, under a long-term gas sales contract which
terminates on May 31, 1999. Although Lone Star has paid for all gas purchased
when such payments were due, any inability of Lone Star to continue to pay for
gas purchased would adversely affect the Company.
Drilling Risk
After obtaining the requisite financing, the Company anticipates
spending as much as $25,000 during the next three years to drill new wells
primarily on acreage acquired from ARCO. Drilling is inherently risky and there
can be no assurance that any wells drilled will be economically viable or enable
the Company to recover the costs of drilling. If the initial wells drilled by
the Company do not find the reserves expected, the Company may not drill
additional wells and the revenues and cash flow expected from such drilling may
never materialize.
Public Market for the Company's Stock
Although there presently exists a market for the Company's stock, such
market is volatile. In addition, the Company's earnings history is sporadic and
the Company has not paid dividends since 1989. Although the Company believes
that its earnings and cash flow will be more predictable in the future, there
can be no assurance that such will be the case. Such volatility may adversely
effect the market price and liquidity of the Company's common stock. In
addition, there are presently, to the Company's knowledge, several brokerage
firms making a market in the Company's common stock. Any cessation of such
market making activities by such brokerage firms could adversely affect the
market for the Company's common stock.
Operational Consideration
The Company's operations are subject to the risks inherent in the
pipeline and oil and gas industries, including the risks of fire, explosion,
pipe failure and environmental accidents such as oil spills, gas leaks and
ruptures or discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. The Company's
operations could be subject to significant interruption in the event any of
these or other problems developed. In accordance with customary industry
practice, the Company maintains liability, property and business interruption
insurance against some, but not all, of the risks described above. There can be
no assurance that such an adverse event will not happen, that the Company's
insurance will be adequate to cover any losses or liabilities or that it would
not have a material adverse affect on the Company's financial condition or
operations.
-22-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the years ended September 30, 1995, 1994 and 1993............ 24
Consolidated Balance Sheets, as of September 30, 1995 and 1994......................................... 26
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and 1993............ 27
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1995,
1994 and 1993....................................................................................... 29
Notes to the Consolidated Financial Statements......................................................... 30
FINANCIAL STATEMENT SCHEDULE:
III. Condensed Financial Information - Parent Company Only............................................ 63
REPORT OF INDEPENDENT ACCOUNTANTS...................................................................... 66
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
</TABLE>
-23-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.............................................. $70,402 $61,228 $56,641
Transportation......................................... 31 35
-------- -------- --------
70,402 61,259 56,676
-------- -------- --------
Exploration and production:
Oil and gas sales...................................... 8,720 8,069 9,268
Administrative fees.................................... 423
Well operations........................................ 477 483 433
-------- -------- --------
9,197 8,552 10,124
-------- -------- --------
79,599 69,811 66,800
-------- -------- --------
Expenses:
Natural gas marketing and transmission:
Gas purchases.......................................... 40,160 37,029 34,441
Operating costs........................................ 1,208 1,139 961
General and administrative............................. 782 1,088 913
Depreciation and amortization.......................... 11,385 11,360 9,495
-------- -------- --------
53,535 50,616 45,810
-------- -------- --------
Exploration and production:
Oil and gas production................................. 2,366 2,629 2,655
General and administrative............................. 1,070 1,429 1,529
Depreciation, depletion and amortization............... 2,770 2,092 2,696
-------- -------- --------
6,206 6,150 6,880
-------- -------- --------
Corporate general and administrative expenses............ 4,995 5,499 2,191
-------- -------- --------
64,736 62,265 54,881
-------- -------- --------
Operating income............................................. 14,863 7,546 11,919
-------- -------- -------
</TABLE>
(Continued on next page)
The accompanying notes are an integral part of these financial statements
-24-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Per Share Amounts)
(continued from previous page)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Other income (expenses):
Interest income................................................... 685 528 31
Other income...................................................... 281 422 54
Interest expense.................................................. (4,046) (9,233) (9,117)
--------- --------- ---------
(3,080) (8,283) (9,032)
--------- --------- ---------
Income (loss) from continuing operations before income taxes and
cumulative effect of a change in accounting principle............. 11,783 (737) 2,887
--------- --------- ---------
Provision for (benefit of) income taxes related to continuing
operations:
State......................................................... 4,728 (68) (43,511)
Federal....................................................... 33,095 (17,009) (570)
--------- --------- ---------
37,823 (17,077) (44,081)
--------- --------- ---------
Income (loss) from continuing operations.............................. (26,040) 16,340 46,968
Income from discontinued refining operations less applicable
income taxes of $19,850, $17,603, and $8,111 in 1995, 1994
and 1993, respectively............................................ 40,937 22,577 12,355
--------- --------- ---------
Income before cumulative effect of a change in accounting
principle......................................................... 14,897 38,917 59,323
Cumulative effect on prior years of change in accounting principle
- adoption of FAS 109............................................. 8,514
--------- --------- ---------
Net income............................................................ $14,897 $38,917 $67,837
========= ========= =========
Net income (loss) per share:
Income (loss) per share from continuing operations - primary...... ($ 3.84) $ 1.46 $ 6.42
========= ========= =========
- fully diluted............................................. ($ 3.84) $ 1.44 $ 6.20
========= ========= =========
Income per share from discontinued refining operations -
primary....................................................... $ 6.04 $ 2.02 $ 1.70
========= ========= =========
- fully diluted............................................. $ 6.04 $ 1.99 $ 1.64
========= ========= =========
Income per share before cumulative effect of a change in
accounting principle - primary................................ $ 2.20 $ 3.48 $ 8.12
========= ========= =========
- fully diluted............................................. $ 2.20 $ 3.43 $ 7.84
========= ========= =========
Cumulative effect of change in accounting principle - primary..... $ 1.16
=========
- fully diluted............................................. $ 1.12
=========
Net income per share - primary.................................... $ 2.20 $ 3.48 $ 9.28
========= ========= =========
- fully diluted............................................. $ 2.20 $ 3.43 $ 8.96
========= ========= =========
Weighted average number of common and common equivalent
shares outstanding - primary.................................. 6,778 11,209 7,316
========= ======== =========
- fully diluted............................................. 6,768 11,397 7,581
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
-25-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
September 30,
1995 1994
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 5,341 $ 18,118
Restricted cash............................................................. 4,959 12,525
Temporary investments....................................................... 4,436
Accounts receivable......................................................... 5,641 22,413
Accounts receivable - related party......................................... 19,941
Inventories................................................................. 83,711
Prepaid expenses and other current assets................................... 153 7,341
Deferred income taxes....................................................... 4,623 68,088
Estimated realizable value of discontinued net refining assets.............. 10,803
-------- --------
Total current assets...................................................... 31,520 236,573
Property, plant and equipment, net:
Refining.................................................................... 295,950
Natural gas transmission.................................................... 22,720 24,535
Furniture, fixtures and equipment........................................... 276 3,245
Oil and gas properties, net..................................................... 17,410 16,146
Gas contracts, net.............................................................. 34,515 43,889
Goodwill, net................................................................... 5,413
Other assets, net............................................................... 463 20,740
Note receivable................................................................. 10,000
-------- --------
Total assets.............................................................. $116,904 $646,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 12,080 $84,297
Current portion of long-term debt - related party........................... 250 9,974
Accounts payable............................................................ 4,715 53,999
Accrued expenses............................................................ 3,284 27,169
Due to related parties...................................................... 17,663
Deferred revenue............................................................ 62,333
Income taxes payable........................................................ 136
Other liabilities........................................................... 3,323 3,771
Net refining liabilities retained........................................... 20,342
-------- --------
Total current liabilities................................................. 43,994 259,342
Long-term debt.................................................................. 23,616 51,361
Long-term debt - related parties................................................ 248,491
Other long-term liabilities..................................................... 83 34,191
Deferred income taxes........................................................... 7,574 15,186
-------- --------
Total liabilities......................................................... 75,267 608,571
-------- --------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized; 6,693,646 and
7,627,646 shares issued and outstanding in 1995 and 1994, respectively.... 3,347 3,814
Additional paid-in capital...................................................... 66,316 75,754
Accumulated deficit............................................................. (28,026) (41,648)
-------- --------
41,637 37,920
-------- --------
Total liabilities and stockholders' equity $116,904 $646,491
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
-26-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 14,897 $ 38,917 $ 67,837
---------- -------- --------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation, depletion and amortization............................... 19,238 43,774 22,185
Amortization of deferred debt issue costs.............................. 2,732 8,885 2,054
Cumulative effect of a change in accounting principle - adoption of
FAS 109............................................................. (8,514)
Deferred income taxes.................................................. 55,799 (2,900) (38,976)
Gain on MG Settlement.................................................. (396,166)
Provision for impairment loss.......................................... 323,078
Changes in assets and liabilities:
(Increase) decrease in restricted cash.............................. 4,750 1,185 (9,153)
(Increase) decrease in temporary investments........................ 4,436 2,811 (65)
(Increase) in accounts receivable................................... 27,685 (6,178) (19,512)
(Increase) decrease in inventory.................................... 57,401 (18,787) (7,942)
(Increase) decrease in prepaid expenses and other current assets.... 6,366 (4,762) (454)
(Increase) decrease in other assets................................. (1,793) (1,523) (970)
Increase (decrease) in accounts payable............................. (29,660) 23,448 24,126
Increase (decrease) in accrued expenses............................. (29,936) 1,958 8,573
Increase in other current liabilities............................... 283 41 3,071
Increase (decrease) in other long-term liabilities.................. (630) 927 906
(Decrease) in due to related parties................................ (9,014) (9,046) (17,014)
Increase (decrease) in deferred revenues............................ (12,124) (65,807) 121,046
---------- -------- --------
Total adjustments............................................... 22,445 (25,974) 79,361
---------- -------- --------
Net cash flow provided by (used in) operating activities........ 37,342 12,943 147,198
---------- -------- --------
Cash flows from investment activities:
Decrease in deposit made on account of acquisition........................ 6,250
Proceeds from sale of furniture, fixtures and equipment................... 4,723 75 265
Investment in refining operations......................................... (35,355) (63,819) (34,394)
Investment in oil and gas properties...................................... (4,022) (956) (13,592)
Investment in pipelines................................................... (47) (21) (27,909)
Purchase of furniture, fixtures and equipment............................. (288) (1,670) (1,265)
Purchase of gas contracts................................................. (63,049)
Purchase of minority interest............................................. (117)
Business acquisition, net of cash acquired................................ (8,230)
---------- -------- --------
Net cash used in investing activities........................... (34,989) (74,621) (133,811)
---------- -------- --------
</TABLE>
(continued on next page)
The accompanying notes are an integral part of these financial statements
-27-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(continued from previous page)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds of long-term debt - related party................................ $ 530 $ 67,915 $ 15,115
Proceeds of long-term debt................................................ 25,108 12,114 168,735
Proceeds from issuance of common stock, net............................... 202 48,207 20
Repayment of long-term debt - related party............................... (4,388) (142,112)
Repayment of long-term debt............................................... (38,781) (48,356) (51,129)
Payment of debt issuance costs............................................ (3,309)
Purchase of treasury stock................................................ (175)
--------- ---------- ---------
Net cash provided by (used in) financing activities................. (12,941) 75,492 (12,855)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................... (10,588) 13,814 532
Cash and cash equivalents - beginning of period.............................. 18,118 4,304 3,772
--------- ---------- ---------
Cash and cash equivalents - end of period.................................... $ 7,530 $ 18,118 $ 4,304
========= ========== =========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest.................................................................. $ 10,207 $ 16,583 $ 18,263
========= ========== =========
Income taxes.............................................................. $ 1,080 $ 8,802 $ 8
========= ========== =========
Interest capitalized during the period....................................... -- $ 1,519 $ 723
========= ========== =========
Supplemental schedule of noncash investing and financing activities..........
Purchase of Powerine Oil Company:
Basis in assets acquired............................................... $ 186,867
Cash paid for capital stock and transaction costs...................... (8,230)
----------
Basis in liabilities assumed........................................ $ 178,637
==========
Payment of related party payables in exchange for reduction in cash
participations........................................................ $ 6,862
=========
MG Settlement, including surrender of 969,000 common shares, cancellation of
debt obligations and the assumption by MG of the
forward sale obligations and Societe Generale loan $ 396,166
=========
Exchange of common stock:
Fair value of debt issuance/extension, processing agreement issuance
costs, and offtake agreement amendments............................. $ 11,855
=========
Acquisition of common stock in exchange for reduction in cash
participations......................................................... $ 39,817
========
Debt issued in exchange for debt extensions and offtake amendments........ $ 5,500
=========
Sale of properties for note............................................... $ 600
=========
Options exercised for short-term receivable............................... $ 45
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
-28-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Treasury Stock
------------ Paid-In ----------- -----------------
Shares Amount Capital (Deficit) Shares Amount Total
------ ------ ------- ----------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-September 30, 1992............ 6,431,264 $3,215 $53,988 ($146,138) 47,376 ($189) ($89,124)
Warrants exercised.................... 20,000 10 10 20
Options exercised..................... 7,500 4 41 45
Treasury stock acquired............... 12,484 (175) (175)
Shares issued for Long-Term
Supply Agreement guaranty.......... 300,000 150 705 855
Shares issued in return for debt
extension and Indian Offtake
Agreement extension............ 1,000,000 500 10,500 11,000
Other................................. 23,742 12 143 155
Net income............................ 67,837 67,837
--------- ------ ------- --------- --------- -------- -------
Balance - September 30, 1993.......... 7,782,506 3,891 65,387 (78,301) 59,860 (364) (9,387)
Treasury stock reissued............... (59,860) (30) (334) (59,860) 364
Shares issued for cash................ 3,500,000 1,750 46,428 48,178
Options exercised..................... 5,000 3 26 29
Shares repurchased with cash
participations..................... (3,600,000) (1,800) (35,753) (2,264) (39,817)
Net income............................ 38,917 38,917
--------- ------ ------- --------- --------- -------- -------
Balance - September 30, 1994.......... 7,627,646 3,814 75,754 (41,648) 37,920
Stock acquired........................ (969,000) (485) (9,622) (1,275) (11,382)
Options exercised..................... 35,000 18 184 202
Net income............................ 14,897 14,897
--------- ------ ------- --------- --------- -------- -------
Balance - September 30, 1995.......... 6,693,646 $3,347 $66,316 ($ 28,026) $41,637
========= ====== ======= ========= ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
-29-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 1 -- BUSINESS AND ORGANIZATION
Settlement with Principal Shareholder
Castle Energy Corporation ("Castle" or "the Company") is a Delaware
Corporation. From September 1989 until October 14, 1994, its principal
shareholder was Metallgesellschaft Corporation ("MG"), an indirect wholly-owned
subsidiary of Metallgesellschaft AG ("MG AG"), a German Conglomerate which had,
in the past, owned as much as 49% of the Company. In addition, the Company had
extensive transactions and agreements with MG and its affiliates as described in
Notes 18 and 21. On August 31, 1994, the Company entered into two agreements
with MG and its affiliates which terminated most relations with MG and
significantly restructured the remaining relationships in fiscal 1995 (the "MG
Settlement") (see Note 3). All amounts related to transactions with MG and its
affiliates are not reported as related party transactions subsequent to October
14, 1994.
Business Segments
Castle's principal lines of business are natural gas marketing and
transmission and oil and gas exploration and production. Until September 30,
1995, the Company was involved in refining operations (see Note 3). The
Company's operations are conducted within the United States.
Natural Gas Marketing and Transmission
On December 3, 1992, the Company acquired from Atlantic Richfield
Company ("ARCO") a long-term natural gas sales agreement (the "Lone Star
Contract") with the Lone Star Gas Company ("Lone Star"), a 77-mile pipeline in
Rusk County, Texas (the "Castle Pipeline"), majority working interests in
approximately 100 producing oil and gas wells and several gas supply contracts.
The acquisition of the Castle Pipeline and the gas contracts created a new
business segment for the Company.
At present the principal use of the Castle Pipeline is to deliver gas
pursuant to the Lone Star Contract. The Company has entered into a management
service contract with MG Gathering Corp. ("MGG"), a subsidiary of MG, to operate
the Castle Pipeline.
The Lone Star Contract expires in June 1999. This contract provides for
minimum daily deliveries of gas at specific fixed prices, and also includes
certain minimum amounts under take-or-pay provisions. Based on reserve reports,
management believes approximately 19% of the annual contract volumes can be
supplied from Company-operated wells; the Company has entered into a long-term
contract with MG Natural Gas Corp. ("MGNG"), a subsidiary of MG, to supply the
remaining gas. At the present time, virtually all gas sales by the natural gas
marketing and transmission segment are to Lone Star.
Oil and Gas Exploration and Production
The Company's oil and gas exploration and production operations
currently include interests in approximately 450 producing oil and gas wells
located in nine states, including the Texas reserves acquired in connection with
the acquisition of the natural gas marketing and transmission assets. At
present, approximately 69% of the Company's production is sold to Lone Star as
described above.
The Company discontinued its oil and gas partnership administration
business effective June 30, 1993 (see Note 21).
-30-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Refining
IRLP
The Company entered the refining business in 1989 when it acquired the
operating assets of an idle refinery located in Lawrenceville, Illinois (the
"Indian Refinery"), which was owned and operated by the Company's subsidiary,
Indian Refining I Limited Partnership ("IRLP"), until September 30, 1995 when it
was shut down. On December 12, 1995, the Indian Refinery assets were sold (for
legal purposes) to American Western Refining, L.P. ("American Western") (see
Note 3).
Powerine
In October 1993, the Company purchased Powerine Oil Company
("Powerine"), the owner of a refinery located in Santa Fe Springs, California
(the "Powerine Refinery") from MG (see Note 4). From October 1, 1993 to February
1, 1995, Powerine sold all of its refined products to MGRM under a product
offtake agreement (the "Powerine Offtake Agreement") subject to MGRM's
obligation to purchase refined products from raw materials on hand at the
Powerine Refinery at (or subject to contracts calling for delivery to the
Powerine Refinery by) February 1, 1995. MGRM's failure to purchase products
refined after February 1, 1995 is at issue in the Powerine Arbitration (see Note
16). On September 29, 1995, Powerine sold (for legal purposes) substantially all
of its refining plant to Kenyen Project Limited ("Kenyen"). On January 16, 1996,
Powerine merged into a subsidiary of Energy Merchant Corp. ("EMC") (see Note 3).
Results of Powerine's operations are included in these financial statements
(discontinued operations - refining) commencing October 1, 1993.
As a result of the transactions with Kenyen, American Western and EMC,
the Company had disposed of its interests in the refining segment. The results
of refining operations are shown as discontinued operations in the Consolidated
Statement of Operations.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements presented include the accounts of
the Company and its subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
Cash and Cash Equivalents; Temporary Investments
The Company considers all highly liquid investments, such as time
deposits, money market instruments, commercial paper and United States
securities, purchased with a maturity of three months or less, to be cash
equivalents. Temporary investments consist of similar investments, as well as
United States government security funds, maturing more than three months from
the date of purchase and are carried at the lower of cost or market. Treasury
Bills which are used to collateralize margin accounts are considered temporary
investments regardless of the maturity date. The Company invests only in AA
rated or better fixed income marketable securities or the short-term rated
equivalent.
Inventories
Inventories are applicable only to the Company's refining segment. Crude
oil, unfinished products and finished products are stated at the lower of cost,
adjusted for hedging gains and losses, or market value. Cost is determined on an
average cost method. Materials and supplies are stated at cost. Cost is
determined using the first-in, first-out ("FIFO") method. Amounts paid to
suppliers for purchases of product prior to the title passing to the Company are
reported as prepaid inventory. At September 30, 1995, all inventories are
classified as "Net refining liabilities retained" in the consolidated balance
sheet and were written down to market value consistent with the Company's
disposition of refining operations.
-31-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of cost or
impaired (fair market) value. Depreciation is recorded on a straight-line basis
over the estimated useful lives of the assets, as follows:
Property, plant and equipment (excluding
buildings).............................. 3-15 years, primarily 15 years
Buildings................................. 30 years
Natural gas pipeline systems.............. 15 years
Furniture and fixtures.................... 3-10 years
Refining
Interest costs incurred during IRLP's refurbishment stage were
capitalized and were depreciated over the estimated useful lives of the
property, plant and equipment to which such costs were allocated. Environmental
costs required to remediate property, plant and equipment were capitalized
during the pre-operating phase and were depreciated over the estimated useful
lives of the related property, plant and equipment. Ongoing environmental
expenditures were reviewed to determine if they extended the life, increased the
capacity, improved the safety or mitigated future environmental risks at the
Indian and Powerine Refineries. If any of these conditions were satisfied, the
costs were capitalized. Otherwise, such costs were expensed as incurred.
Commencing in the first quarter of fiscal 1995, the Company decided to dispose
of its refining segment. At that time all refining property, plant and equipment
was written down to its estimated fair market value.
Costs for precious metal catalysts were included in refining property,
plant and equipment and were not amortized. Such catalyst was reduced to its
fair market value in October 1994.
Refining property, plant and equipment and catalyst as of September 30,
1995 are included in the balance sheet classification "Estimated realizable
value of discontinued net refining assets."
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 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 property occurs. Management and drilling fees earned in connection with the
transfer of oil and gas properties to a joint venture and proceeds from the sale
of oil and gas properties are recorded as reductions in capitalized costs unless
such sales are material and involve a significant change in the relationship
between cost and the value of proved reserves in which case a gain or loss is
recognized. Expenditures for repairs and maintenance of wellhead equipment are
expensed as incurred. Net capitalized costs in excess of the estimated present
value of future cash inflows from proved oil and gas reserves, reduced by
operating expenses and future development expenditures, if any, are charged to
current expense.
Impairment of Long-Term Assets
The Company adopted Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
during the second quarter of fiscal 1995. The effect of adoption was not
significant. Accordingly, the Company reviews its long-term assets other than
oil and gas properties for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may 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 is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss would be based
-32-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
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
Refining
The Company employed several hedging strategies to minimize the impact
of the volatility in feedstock costs. These strategies generally involved the
purchase and sale of exchange-traded, energy-related futures and options with a
duration of 12 months or less. The Company hedged current inventory and future
commitments. The number of barrels of crude oil and refined products covered by
such contracts varied from time to time. Such purchases and sales were closely
managed, balanced daily and subject to internally established risk standards.
Gains and losses from hedging activities were credited or debited to the value
of the inventory being hedged. The Company's crude oil hedging activities ceased
by September 30, 1995 by which time the Company's two refineries had ceased
operations.
Natural Gas Marketing and Transmission
Subsequent to September 30, 1995, the Company commenced hedging
operations related to its natural gas marketing operations using swap agreements
(see Note 16). Gains and losses from natural gas hedging operations will be
debited or credited to gas sales or purchases, as applicable.
Other Assets
Costs incurred related to the initial issuance or extension of debt or
other long-term agreements are capitalized and amortized over a) the stated term
of the related agreement or b) the expected term of benefit of the agreement, if
shorter than the stated term. Unamortized costs are written-off when the related
agreement is terminated. Costs for long-term catalysts were capitalized and
amortized on a straight-line basis over the estimated useful lives of such
catalysts - generally 2.5 to 10 years (See Note 12). As of September 30, 1995,
the Company had discontinued the refining operations in which the catalyst was
used.
Goodwill
Goodwill was recorded in conjunction with the acquisition of Powerine
and was amortized on a straight-line basis (15 years). The remaining book value
of goodwill was subject to the impairment considerations discussed in Note 3.
Gas Contracts
The purchase price allocated to the Lone Star Contract (see Note 4) was
capitalized and is being amortized over the term of the related contract (6.5
years).
Deferred Revenue
Commitments related to forward sales were recorded at their fulfillment
value at the date of the transaction. The difference between the cash proceeds
and the future commitments were amortized over the lives of the agreements using
the interest method. As part of the MG Settlement, liabilities related to a
forward sale were assumed by MG and such amount was included in the $391,135
gain to the Company on the MG Settlement.
Gas Balancing
The Company operates under several natural gas sales contracts where it
is entitled to sell other owners' shares of natural gas produced from a well if
such other owners do not elect to sell their shares of production. Under the
terms of the related gas sales contracts, the non-selling owners are entitled to
make up gas sales from the Company's share of production in the future. The
-33-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Company records sales of other owners' production as deferred revenue and
recognizes such deferred revenue when the other owners make up their gas
balancing deficiency from the Company's share of production.
Income Taxes
In October 1992, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. FAS 109 is an
accounting approach that 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 or tax returns. In estimating
future tax consequences, FAS 109 generally considers all expected future events
other than anticipated enactments of changes in the tax law or rates.
Previously, the Company used the FAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts (see Note 20). FAS 109 also requires
that tax provisions and recoveries related to changes in the valuation reserve
for deferred tax assets because of a change in circumstances that causes a
change in judgement about the realizability of the related deferred tax asset in
future years be allocated entirely to continuing operations.
Earnings Per Share
Primary earnings per common share are based upon the weighted average
number of common and common equivalent (if considered dilutive) shares
outstanding using either the treasury stock or modified treasury stock method.
Fully diluted earnings per common share are presented for all succeeding annual
periods where the dilution in earnings per share resulting from full dilution is
greater than 3%. All share and per share amounts have been restated to give
affect to the 1-for-2 reverse split which was effective November 12, 1993.
Reclassifications
Certain reclassifications have been made to make the periods presented
comparable.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles 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.
NOTE 3 -- MG SETTLEMENT AND DISCONTINUED OPERATIONS - REFINING
On August 31, 1994, the Company entered into agreements with MG and
certain of its affiliates pursuant to which the parties thereto agreed to amend
or terminate a number of contractual relationships between them. In the first
step of the MG Settlement, which closed on September 9, 1994, MG transferred
3,600,000 shares of common stock of the Company to the Company in exchange for
$39,817 of participations the Company held in debt obligations of the Company
and its affiliates to MG Trade Finance Corp. ("MGTFC"), a wholly-owned
subsidiary of MG.
In the second step of the MG Settlement, which closed on October 14,
1994, MG (a) cancelled certain debt obligations owed to MGTFC by the Company and
its affiliates and assumed IRLP's obligations under its $120,000 Senior Facility
with Societe Generale, together totaling $321,282, (b) transferred back to the
Company the remaining 969,000 shares of common stock held by MG and a $5,500
debenture convertible into 500,000 shares of common stock, (c) issued to the
Company a $10,000 note payable in three years, (d) terminated all of its
interests in the Company's natural gas operations and (e) agreed to supply all
crude oil necessary for the Company to meet its delivery obligations under a
forward sale contract with a third party entered into during September 1993. In
exchange for the foregoing, IRLP and Powerine (i) amended their Offtake
Agreements to terminate effective February 1, 1995 although sales under the
Powerine Offtake Agreement were to continue subsequently, (ii) amended their
-34-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
working capital facilities to terminate on March 31, 1995, and (iii) transferred
to MG certain of the Company's participations in debt obligations of the Company
and its affiliates to MGTFC. In connection with the MG Settlement, IRLP and MGNG
also entered into a four-year natural gas swap agreement and MG agreed that the
Company, through March 31, 1995, could unilaterally terminate its gas supply
agreement with MGNG ("MGNG Gas Supply Agreement"). As a result of the MG
Settlement, the Company realized a gain of $391,135, consisting of $396,166
gross proceeds less $5,031 of investment banking fees and related expenses.
The completion of the transactions contemplated by the MG Settlement had,
among others, three consequences for the Company. First, the offtake agreements
with MG terminated and the Company, until it sold the Refineries, was required
to market its own products and was subject to market risks. Second, also in
1995, the working capital facilities provided by MGTFC terminated. Third, for
Federal and state income tax purposes, the Company recognized income of
approximately $391 million, on which, after giving effect to applicable net
operating loss and other tax carryforwards and other items of expense and
deduction, Federal and state income taxes of approximately $91 million would
have been owed had the Company not disposed of or discontinued the Refinery
operations.
After the MG Settlement was consummated, the Company decided to
discontinue the operations of its refining business and to sell or retire its
two refineries. At December 31, 1994, the Company provided $345,008 for the
estimated impairment of the related assets.
In July 1995, operations ceased at the Powerine Refinery and the Company
retired the assets of the Powerine Refinery. On September 29, 1995, Powerine
sold substantially all of the refining plant assets to Kenyen, retaining certain
rack facilities and the land on which the Powerine Refinery is situated. The
purchase price was $22,763 consisting of $3,000 cash and a note for $19,763. The
note is secured by the Powerine refining plant and bears interest at 10%. The
note is due in three equal installments of principal and interest of $7,108 (of
which $19,763 is principal) on April 30, June 30 and September 30, 1996. On
January 16, 1996 Powerine merged into a subsidiary of EMC. As part of the sale,
EMC also indemnified Powerine and the Company for any and all environmental
liabilities of Powerine.
On September 30, 1995, operations also ceased at the Indian Refinery and
the Company retired the plant assets of the Indian Refinery. On December 12,
1995, the Company sold the plant assets of the Indian Refinery to American
Western, a subsidiary of Gadgil Western Corporation ("Gadgil"). The purchase
price was $8,000, including $3,000 cash and a note for $5,000. The note bears
interest at 8% and is due on the earlier of October 31, 1996 or the date
American Western obtains financing to restart the Indian Refinery. The note is
secured by the real property and the Indian Refinery. American Western also
assumed certain liabilities of IRLP, including employee pension and all
environmental liabilities, in conjunction with the sale. The Company also sold
certain precious metal catalysts to American Western for a note for $1,803. The
note bears interest of 8% and was due February 11, 1996. The parties extended
the due date of the note to March 22, 1996.
As a result of the discontinuance of refining operations, all assets and
liabilities related to the refining segment have been netted. The realizable
value of net refining assets sold subsequent to September 30, 1995 is shown
under the caption "Estimated realizable value of discontinued net refining
assets" on the accompanying Consolidated Balance Sheet. The estimated value of
the refining liabilities retained is shown under the caption "Net refining
liabilities retained." At September 30, 1995, the assets and liabilities
applicable to the refining segment consisted of the following:
-35-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Estimated realizable value of discontinued net refining assets:-
Carrying value prior to write down to net realizable value:
September 30,
1995
-------------
Property, plant and equipment, net....................... $340,280
Goodwill, net............................................ 5,413
Catalyst, net............................................ 4,191
Environmental liabilities................................ (36,061)
Other, net .............................................. 20,058
---------
333,881
Impairment reserve............................................... (323,078)
---------
$ 10,803
=========
Net refining liabilities retained:
Revolving credit loan (see Note 15)......................... $13,249
Other working capital deficit, net.......................... 7,093
---------
$20,342
"Estimated realizable value of discontinued net refining assets" is
based on the transactions consummated with American Western and EMC and includes
management's best estimates of the amounts expected to be realized on the
disposal of the refining segment. The amounts the Company ultimately realizes
could differ materially in the near term from such amounts. "Net refining
liabilities retained" includes management's best estimates of amounts expected
to be paid and amounts expected to be realized on the settlement of this net
liability.
Summary operating results of discontinued operations are as follows and
include the $391,135 gain realized on the settlement with MG and the $323,078
impairment writedown.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................................... $711,976 $940,514 $532,011
======== ======== ========
Income before income taxes.................................................. $ 60,787 $ 40,180 20,466
Provision for income taxes.................................................. 19,850 17,603 8,111
--------- ---------- ---------
Net earnings from discontinued operations................................... $ 40,937 $ 22,577 $ 12,355
========= ========= =========
</TABLE>
In computing the operating results of discontinued operations, interest
expense specifically associated with refining debt has been included in
discontinued operations.
NOTE 4 -- ACQUISITIONS
As described in Note 1, on December 3, 1992, the Company acquired
certain oil and gas assets from ARCO. The purchase price of $103,680 consisted
of $95,934 in cash paid for assets, $5,634 cash paid for transaction costs and
$2,112 in liabilities assumed. The asset acquisition was accounted for as a
purchase. The Company's allocation of the purchase price is as follows:
-36-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Gas contracts............................... $ 61,348
Gas pipeline................................ 27,439
Oil and gas properties...................... 13,193
Deferred tax asset.......................... 1,700
----------
$103,680
==========
As of October 1, 1993, the Company acquired from MG an option to acquire
Powerine, the owner of the Powerine Refinery, a 49,500 barrel per day refinery
located in Santa Fe Springs, California in consideration of (i) the payment of
$8,000; (ii) the assumption of a $3,027 indemnity obligation related to yield
losses incurred by Powerine under a processing arrangement with MG, (iii) the
assumption of a $2,675 tax indemnification to the previous owner of Powerine;
(iv) the assumption of debt obligations to MG of $128,002 and other liabilities
of $44,933; and (v) the payment of transaction costs of $980. In addition, the
Company borrowed $2,971 from MGTFC to purchase feedstocks. The acquisition was
accounted for as a purchase at predecessor basis due to the significant related
party relationship. The Company recorded $160,106 of refinery assets, $14,151 of
other tangible assets and the remaining $13,360 of goodwill and deferred tax
assets. The Company immediately exercised the option to acquire Powerine for a
nominal amount, and concurrently (a) entered into the Powerine Offtake Agreement
with MG (b) amended Powerine's loan agreement with MGTFC and (c) amended the
Company's crude oil supply agreement with MG to include Powerine as a party. To
finance the acquisition, a subsidiary company resold to MGTFC a cash
participation in the revolving credit facility provided by MGTFC to IRLP. The
results of operations of Powerine are included in the statement of operations
(discontinued operations - refining) commencing October 1, 1993.
Purchase of ARCO Royalty
In October 1994, one of the Company's exploration and production
subsidiaries purchased certain royalty interests held by ARCO in wells purchased
by another of the Company's exploration and production subsidiaries from ARCO in
December 1992. The purchase price was $3,823.
NOTE 5 - RESTRICTED CASH
Restricted cash consists of the following:
September 30,
-----------------
1995 1994
---- ----
Gas revenues deposited in lender's escrow account..... $4,143
Environmental escrow funds............................ $ 5,589
Funds supporting letters of credit.................... 362 1,365
Capital funding accounts.............................. 4,017
Other................................................. 454 1,554
------ -------
$4,959 $12,525
====== =======
NOTE 6 - TEMPORARY INVESTMENTS
Temporary investments consist of the following:
September 30, 1994
------------------
Treasury bills.......................................... $2,490
Commercial paper........................................ 1,946
-------
$4,436
=======
-37-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The Company invested in United States Treasury Bills with a maturity of
less than 90 days and had pledged this investment as collateral for NYMEX margin
activity. In addition, commercial paper purchased through a major bank had been
pledged as collateral against letters of credit held by the Illinois
Environmental Protection Agency (see Note 14).
NOTE 7 - ACCOUNTS RECEIVABLE
Based upon past customer experiences combined with the limited number of
customer accounts receivable relationships, management believes all receivables
to be collectible. Accounts receivable consist of the following:
September 30,
-------------------------
1995 1994
---- ----
Natural gas marketing......................... $4,450 $11,472
Unrealized gain on forward commitments........ 847
Insurance claims and refunds.................. 3,160
Oil and gas................................... 991 1,485
Income tax refunds............................ 4,770
Refined products.............................. 342
Other......................................... 200 337
------- -------
$5,641 $22,413
====== =======
NOTE 8 -- INVENTORIES
Inventories consisted of the following:
September 30, 1994
------------------
Crude oil................................................... $49,029
Unfinished products......................................... 19,549
Finished products........................................... 4,458
Materials and supplies...................................... 10,675
--------
$83,711
========
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
Refining property, plant and equipment consisted of the following:
September 30, 1994
------------------
Refining plant............................................... $260,379
Refining plant - capitalized turnaround costs................ 23,218
Land......................................................... 10,550
Precious metal catalyst...................................... 3,338
Transportation and heavy equipment........................... 1,789
Maintenance and technical equipment.......................... 1,892
Buildings.................................................... 1,332
Construction in progress..................................... 40,238
--------
342,736
Less: Accumulated depreciation and amortization of capitalized
turnaround costs ................................................ (46,786)
--------
$295,950
========
-38-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Natural gas transmission consists of the following:
September 30,
-------------
1995 1994
---- ----
Natural gas pipeline........................... $27,977 $27,930
Less: Accumulated depreciation................. (5,257) (3,395)
------- -------
$22,720 $24,535
======= =======
Furniture, fixtures and equipment are as follows:
September 30,
---------------------
1995 1994
---- ----
Furniture, fixtures and equipment............... $467 $4,177
Less: Accumulated depreciation.................. (191) (932)
----- --------
$276 $3,245
==== ======
Gas contracts consist of the following:
September 30,
---------------------
1995 1994
---- ----
Gas contracts................................ $61,151 $61,151
Less: Accumulated amortization............ (26,636) (17,262)
------- -------
$34,515 $43,889
======= =======
NOTE 10 - OIL AND GAS PROPERTIES
September 30,
-------------
1995 1994
---- ----
Evaluated properties............................... $28,175 $24,153
Less: Accumulated depreciation, depletion and
amortization...................................... (10,668) (7,910)
Accumulated full cost ceiling reserve............ (97) (97)
------- -------
17,410 16,146
Unevaluated properties.............................
------- -------
$17,410 $16,146
======= =======
Capital costs incurred by the Company in oil and gas activities, all of
which are located in the United States, are as follows:
September 30,
-------------------------
1995 1994 1993
---- ---- ----
Property acquisition costs - proved properties...... $3,823 $13,616
Development costs................................... 199 $956 (24)
------ ---- -------
$4,022 $956 $13,592
====== ==== =======
Results of operations, excluding corporate overhead and interest
expense, from the Company's oil and gas producing activities are as follows:
-39-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Crude oil, condensate, natural gas liquids and natural gas sales.......... $8,720 $8,069 $9,268
------ ------ ------
Costs and expenses:
Production costs.......................................................... $2,366 $2,629 2,655
Depreciation, depletion and amortization.................................. 2,757 2,014 2,657
------- ------- -------
Total costs and expenses.................................................. 5,123 4,643 5,312
------- ------- -------
Income tax provision........................................................ 1,439 1,370 1,582
------- ------- -------
Income from oil and gas producing activities................................ $2,158 $2,056 $2,374
====== ====== ======
</TABLE>
The income tax provision is computed at the blended rate (Federal and
state combined) of 40%.
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:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Depreciation, depletion and amortization.................................... $2,757 $2,014 $2,657
====== ====== ======
Depletion rate per equivalent MCF of natural gas............................ $0.68 $0.51 $0.71
====== ====== ======
</TABLE>
NOTE 11 - PROVED OIL AND GAS RESERVES AND RESERVE VALUATION (UNAUDITED)
Reserve estimates are based upon subjective engineering judgements made
by the Company's independent petroleum reservoir engineers, Ryder Scott and
Huntley & Huntley, 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:
Oil (BBLS) Natural Gas (MCF)
---------- ----------------
Proved developed and undeveloped reserves:
As of October 1, 1992............................ 199,863 13,699,197
Revisions of previous estimates.............. 17,686 17,401,101
Extensions, discoveries and other additions.. 334,625
Sales of minerals in place................... (36,544) (860,224)
Acquisition of minerals in place............. 102,524 18,376,189
Production................................... (45,175) (3,472,133)
-------- -----------
As of September 30, 1993......................... 238,354 45,478,755
Revisions of previous estimates.............. 136,132 13,051,146
Production................................... (52,078) (3,605,915)
-------- -----------
As of September 30, 1994......................... 322,408 54,923,986
Revisions of previous estimates.............. 65,562 2,537,310
Acquisition of minerals in place............. 13,882 2,828,172
Production................................... (50,972) (3,721,249)
-------- -----------
As of September 30, 1995......................... 350,880 56,568,219
======= ==========
-40-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Oil (BBLS) Natural Gas (MCF)
---------- -----------------
Proved developed reserves:
October 1, 1992...................... 199,863 8,418,300
======= ==========
September 30, 1993................... 238,354 41,926,376
======= ==========
September 30, 1994................... 300,813 45,941,369
======= ==========
September 30, 1995................... 248,228 31,534,882
======= ==========
The revisions of previous estimates in fiscal 1993 and fiscal 1994
result from significant additions of proved undeveloped and proved developed
non-producing reserves.
All of the Company's oil and gas reserves are located in United States.
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 Statement of Financial Accounting Standards 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.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1995 1994 1993
--------- ------- ---------
<S> <C> <C> <C>
Future cash inflows......................................................... $103,811 $97,098 $115,838
Future production costs..................................................... (32,537) (35,994) (47,656)
Future development costs.................................................... (22,976) (12,995) (19,010)
Future income tax expense................................................... (6,829) (5,875) (3,321)
--------- ------- ---------
Future net cash flows....................................................... 41,469 42,234 45,851
Discount factor of 10% for estimated timing of future cash flows............ (20,096) (23,769) (18,895)
--------- ------- ---------
Standardize measure of discounted future cash flows......................... $ 21,373 $18,465 $ 26,956
========= ======= =========
</TABLE>
The future cash flows were computed using the applicable year-end prices
and costs and respective year-end statutory tax rates that related to then
existing proved oil and gas reserves in which the Company has mineral interests.
The estimates of future income tax expense are computed at the blended rate
(Federal and state combined) of 40%.
-41-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The following were the sources of changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1995 1994 1993
--------- ------- ---------
<S> <C> <C> <C>
Standardized measure, beginning of year..................................... $18,465 $26,956 $10,618
Sale of oil and gas, net of production costs................................ (6,354) (5,440) (6,613)
Net changes in prices....................................................... 4,474 (9,927) 1,994
Extensions and discoveries.................................................. - - 314
Purchases of reserves in place.............................................. 3,016 - 8,809
Changes in estimated future development costs............................... (6,158) 5,079 (9,525)
Development costs incurred during the period that reduced future
development costs........................................................ 207 706 228
Sale of reserves in place................................................... - - (853)
Revisions in reserve quantity estimates..................................... 1,601 8,887 18,952
Net changes in income taxes................................................. (952) (616) (1,624)
Accretion of discount....................................................... 1,847 2,696 1,062
Other:
Change in timing of production........................................... 3,566 (5,814) 3,043
Other factors............................................................ 1,661 (4,062) 551
------- ------- -------
Standardized measure, end of year........................................... $21,373 $18,465 $26,956
======= ======= =======
</TABLE>
NOTE 12 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Indian Offtake Agreement extension - related party......................................... $11,725
Debt issuance costs........................................................................ $ 87 2,957
Debt issuance costs - related party........................................................ 8,757
Long-term catalysts........................................................................ 5,176
Long-term supply agreement support - related party......................................... 855
Forward Sale deferred interest and related costs........................................... 7,273
Officer note receivable.................................................................... 250
Organization costs, net.................................................................... 805 805
Other...................................................................................... 12 600
----- -------
904 38,398
Less: Accumulated amortization............................................................. (441) (17,658)
----- -------
$463 $20,740
===== =======
</TABLE>
In fiscal 1993, the Company recorded $17,355 of deferred assets which
reflected the fair value of the Company's common stock, warrants to purchase
common stock and convertible debt issued to certain shareholders, principally
MG, and their nominees. The securities were issued in consideration for debt
issuances, debt extensions, processing agreements and the extension of the
Indian Offtake Agreement. On October 14, 1994, in conjunction with the MG
Settlement, the Company wrote off all deferred assets related to the agreements
terminated on that date (see Note 3).
-42-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 13 - ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30,
-----------------------
1995 1994
---- ----
Interest......................................... $ 391 $ 679
Employee related costs........................... 1,003 7,924
Taxes, including payroll taxes................... 877 9,622
Stock appreciation rights........................ 4,191
Environmental.................................... 1,132
Other............................................ 1,013 3,621
------ -------
$3,284 $27,169
====== =======
NOTE 14 - ENVIRONMENTAL MATTERS
Indian Refining Company
In October 1989, in connection with the Illinois Environmental
Protection Agency's (the "IEPA") concern over contamination from operations
prior to the Company's acquisition of the Indian Refinery, Indian Refining
Company ("IRC"), a wholly-owned subsidiary of the Company which then owned the
Indian Refinery, signed an agreement in principle (the "Agreement in Principle")
with the IEPA which requires IRC to conduct certain environmental tests to
determine the nature and extent of historical contamination at the Indian
Refinery, to develop remediation plans as necessary for the contamination
revealed by the testing, and to provide up to $1,000 of financial security until
the work is completed. IRC recorded the liability related to its obligation to
the IEPA at $5,170. At September 30, 1995, the liability had been reduced to
$3,557. Such environmental liability is included in the determination of the
estimated realizable value of discontinued net refining assets.
On December 12, 1995, the Company sold the stock of IRC to American
Western for one dollar (see Note 3).
Indian Refining Limited Partnership
As part of the purchase of the Indian Refinery from IRLP (see Note 3),
American Western assumed all environmental liabilities of IRLP. At September 30,
1995, such environmental liabilities consisted of an accrued environmental
remediation liability of $8,943 and accrued hazardous waste removal expenses of
$1,458. Such liabilities are included in the determination of the estimated
realizable value of discontinued net refining assets.
Powerine Oil Company
Powerine is the subject of various environmental claims, including being
named as a potentially responsible party ("PRP") in three sites in California.
Powerine, in consultation with outside legal counsel and environmental
specialists, had recorded, prior to its acquisition by Castle, a $28,000 reserve
for various long-term environmental claims. This reserve was to satisfy pending
and anticipated claims such as those related to such discontinued operations
like former gasoline service stations and pipelines, historic off-site waste
disposal sites located within the state of California, refinery groundwater
contamination, and alleged impacts on nearby properties.
At September 30, 1995, the reserve for environmental claims had been
reduced to $23,561 based upon settlements of several environmental claims and
recent environmental appraisals. Such environmental reserve is included in the
determination of the estimated realizable value of discontinued net refining
assets. On January 16, 1996, Powerine merged into a subsidiary of EMC. As a
result of this transaction, Powerine's environmental liabilities were eliminated
from the Company's Consolidated Balance Sheet. In addition, the principal
shareholder of EMC indemnified the Company with respect to Powerine's
environmental liabilities.
-43-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
As a result of the sales to Kenyen, American Western and EMC, the
Company had divested its refining operations. Nevertheless, should Kenyen,
American Western and/or EMC fail in their efforts with respect to the refineries
they purchased or fail to pay notes due to the Company, it is possible that the
Company and/or its subsidiaries could be included in efforts by vendors to
collect trade payables and/or by environmental authorities in efforts to collect
environmental liabilities. All of the aforementioned entities have minimum
capital.
Although the environmental liabilities related to both of the Company's
Refineries have been assumed by others, there can be no assurance that the
Company or one of its subsidiaries will not be sued for matters related to
environmental liabilities of the Refineries. All three of the companies to which
the refining assets were sold are thinly capitalized and without significant
financial resources. All three are currently seeking to raise financing for
restarting a refinery or for payment of notes related to the purchase of one
refinery. If any of these companies fails in such endeavors and cannot pay such
notes or environmental liabilities, it is possible that the Company or IRLP
(still a subsidiary of the Company) would be party in related legal actions.
Although the Company does not believe it has any liabilities with respect to
such environmental liabilities, a court of competent jurisdiction may find
otherwise and the Company may be required to fund portions of such liabilities.
In recent years, government and other plaintiffs have often sought redress for
environmental damage from the party most capable of payment without regard to
responsibility or fault. Whether or not the Company is ultimately held liable in
such a circumstance, should litigation involving the Company and/or IRLP occur,
the Company would incur substantial legal fees and experience a diversion of
management resources from other operations.
NOTE 15 - DEBT
Long-term debt consists of the following:
September 30,
----------------------
1995 1994
---- ----
Senior Facility................................... $73,041
GECC Loan......................................... $33,196 60,117
Other............................................. 2,500 2,500
------- -------
35,696 135,658
Less: Current portion............................ (12,080) (84,297)
------- -------
$23,616 $51,361
======= =======
The Senior Facility related to IRLP's term debt with a third party
financial institution, Societe Generale. All outstanding obligations under this
facility were assumed by MG on October 14, 1994 in conjunction with the MG
Settlement.
The General Electric Corp. ("GECC") Loan was made to two of the Company's
natural gas subsidiaries, Castle Texas Pipeline L.P. ("Pipeline") and CEC Gas
Marketing L.P. ("Marketing"). The GECC Loan bears interest of 8.33% and is
secured by a first security interest in all of the assets of Pipeline and
Marketing, as well as a pledge of the partnership interests and capital stock of
the general and limited partners of these partnerships. All of the cash flow
generated by Pipeline and Marketing is dedicated to repayment of the GECC Loan.
Although the minimum required 1996 principal payment is $9,580, the Company
expects it will pay approximately $24,000 during 1996.
The cash flow generated by Castle Texas Production L.P. ("Production"),
another wholly-owned subsidiary of the Company, less a specified allowance for
operating expenses, is also dedicated to repayment of the GECC Loan.
The other long-term debt of $2,500 earns interest at the twelve-month
LIBOR rate determined annually on December 11, plus 1/2% (8.06% at September 30,
1995). The debt is due to a financial institution which was previously a
shareholder of the Company. The debt is due in equal quarterly installments of
$625 through June 30, 1996. Subsequent to September 30, 1995, $1,250 of the
other long-term debt was repaid.
-44-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Long-term debt - related parties consists of the following:
September 30,
--------------------
1995 1994
---- ----
MGTFC - Credit agreements............................. $167,880
Loan from Stockholder................................. $250 250
MGTFC Subordinated Loan............................... 9,441
MGTFC Subordinated Note............................... 72,281
MGTFC Revolving Credit Facility....................... 26,861
MG Convertible Debenture.............................. 5,500
Cash Participations................................... (23,748)
------ -------
250 258,465
Less: Current portion, net of cash participations.... (250) (9,974)
---- --------
$ - $248,491
==== ========
As a result of the MG Settlement on October 14, 1994, the loans due to
MG and its subsidiaries (credit agreements, subordinated loan, subordinated
note, revolving credit facility and convertible debentures), net of the
offsetting cash participations in such loans held by the Company, were
discharged (see Note 3). Together with the discharge of the Senior Facility (see
above), such discharged obligations aggregated $321,282 at October 14, 1994.
The Loan from Stockholder of $250 earns interest at the twelve-month
LIBOR rate determined annually on December 11, plus 1/2% (8.06% at September 30,
1995). The debt is due to a stockholder who was also a director of the Company
until January 5, 1996. The debt is due in equal quarterly installments of $63
through June 30, 1996. Subsequent to September 30, 1995, $125 of the Loan from
Stockholder was repaid.
Replacement Credit Facility
On May 25, 1995, IRLP's Revolving Credit Facility with MGTFC (see below)
was refinanced with a $30,000 facility from Bankers Trust, a financial
institution. The credit facility ("Replacement Credit Facility") was granted to
Indian Oil Company ("IOC"), another wholly-owned subsidiary of the Company. The
facility is secured by the inventory, receivables and precious metal catalyst of
Indian, bears interest at prime plus two percent (10.75% at September 30, 1995)
and is guaranteed by the Company and secured by certain non-refining
subsidiaries' exploration and production assets (net book value of approximately
$25,272 at September 30, 1995).
On September 24, 1995, IOC defaulted on the Replacement Credit Facility.
As of September 30, 1995, $13,249 was outstanding under the loan. In
conjunction with the shutdown of the Indian Refinery on September 30, 1995, the
Company began liquidating Indian's assets to satisfy the loan obligations. At
February 29, 1995, the amount outstanding under the loan had been reduced to
$4,540. The Company projects that liquidation value of the collateral supporting
the obligations will be approximately $2,000 less than the loan. Such amount
will be funded by the Company. The Company has agreed to repay the Replacement
Credit Facility and has obtained a conditional commitment letter from a bank for
related financing.
Maturities
The scheduled maturities of long-term debt outstanding as of September
30, 1995 are as follows:
For the Year Ending September 30,
- ---------------------------------
1996.........................................$12,080
1997......................................... 23,616
-------
$35,696
=======
-45-
<PAGE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has the following noncancelable operating lease commitments
at September 30, 1995:
For the Year Ending September 30,
- ---------------------------------
1996......................................... $195
1997......................................... 182
1998......................................... 159
-----
$536
====
Rent expense for the years ended September 30, 1995, 1994 and 1993,
excluding refining related rent expense, was $255, $255 and $239, respectively.
Compensation Obligations
As of September 30, 1995, the Company has an obligation to fulfill
employment agreements with several of its employees. Subsequent to September 30,
1995, the Company terminated several employment agreements with officers of its
subsidiaries. The Company's compensation obligations, including severance
payments to terminate officers, are as follows:
For the Year Ending September 30,
---------------------------------
1996......................................... $2,129
1997......................................... 143
------
$2,272
======
Under the terms of the employment agreements in effect as of September
30, 1995, certain officers were entitled to bonuses to the extent earnings of
certain subsidiaries, as defined, exceeded certain thresholds. For the years
ended September 30, 1995, 1994 and 1993, no bonuses were accrued.
Letters of Credit
At September 30, 1995, the Company and its subsidiaries had issued or
guaranteed letters of credit as follows:
<TABLE>
<CAPTION>
Description Amount Expiration
----------- ------ ----------
<S> <C> <C>
Oil and gas drilling, operating and plugging bonds............. $ 205 Various
Security for IEPA obligations (see Note 14).................... 1,040 January - September 1996
------
$1,245
======
</TABLE>
The letters of credit applicable to IEPA obligations were issued by IRC,
which was sold to American Western in December 1995 (see Note 3).
-46-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Long Term Supply Commitments
The Company has a gas purchase agreement with MGNG (see Note 21).
Aggregate future commitments under the gas purchase long-term supply commitment
are as follows:
For the Year Ending September 30,
1996.......................................... $ 32,004
1997.......................................... 31,250
1998.......................................... 31,748
1999.......................................... 8,009
---------
$103,011
========
If MGNG fails to perform its obligations under this contract, there is
no assurance that Marketing could fulfill its obligations under the Lone Star
Contract in a manner which would permit Marketing to maintain its current profit
margin on sales of natural gas.
The Company also has a commitment to sell 7,356 mcf (thousand cubic
feet) of natural gas at a fixed price from June 1, 1996 to May 31, 1999. The
Company anticipates supplying the gas from new drilling. The Company's
obligations to sell natural gas to MGNG are as follows:
For the Year Ending September 30,
MCF
(Thousand of cubic feet)
------------------------
1996............................................ 817
1997............................................ 2,452
1998............................................ 2,452
1999............................................ 1,635
-----
7,356
=====
Subsequent to September 30, 1995, Production entered into a swap
agreement to hedge 16% of the gas to be sold to MG at a fixed price. The hedged
price was less than the fixed price resulting in a future profit to the Company
of approximately $200. Production has not yet hedged the other 84% of the gas
that must be delivered to MGNG under the contract. If gas prices increase above
the fixed price to MGNG, Production could incur a loss if it buys or produces
the gas to supply MGNG on the remaining unhedged volumes.
Management Agreements
The Company has two long-term management agreements with Terrapin
Resources, Inc. ("Terrapin") to provide accounting and management with respect
to the Company's exploration and production assets. Terrapin is wholly-owned by
an officer of the Company. Obligations under these agreements are as follows:
For the Year Ending September 30,
1996............................................$ 530
1997............................................ 396
1998............................................ 412
1999............................................ 283
-------
$1,621
======
-47-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The Company also has two management agreements with subsidiaries of MG
to manage certain pipeline and gas marketing functions. Obligations under these
management agreements are as follows:
For the Year Ending September 30,
1996........................................... $ 420
1997........................................... 437
1998........................................... 454
1999........................................... 317
------
$1,628
======
Additionally, the Company's natural gas marketing and pipeline segment
sells substantially all of its natural gas to only one customer -- Lone Star.
Sales to Lone Star by the Natural Gas Marketing and Transmission segment
aggregated $70,318, $61,228 and $56,641 for the fiscal years ended September 30,
1995, 1994 and 1993, respectively. Approximately 19% of Lone Star' requirements
under the gas sales contract are supplied from wells operated by the Company.
The balance of these requirements are purchased from MGNG pursuant to a gas
purchase contract. If MGNG were to fail to perform its obligations under this
contract, there could be no assurance that the Company could fulfill its
obligations under the Lone Star Contract in a manner which would permit the
Company to maintain its current profit margin on sales of natural gas.
Legal Proceedings
Long-Term Supply Agreement
In 1993, IRLP entered into a Long-Term Supply Agreement (the "LTSA")
with Shell Canada Limited and Salmon Resources Ltd. (collectively "Shell") for
the supply of Caroline Condensate feedstock to the Indian Refinery. MGRM agreed
to be the alternate purchaser under the LTSA in the event IRLP should fail to
perform. On December 23, 1994, Shell filed suit in the United States District
Court for the Northern District of Illinois against IRLP and MGRM (the "Shell
Litigation"). The complaint alleged that MGRM failed to provide Shell with
adequate assurances, pursuant to a request under the Illinois Commercial Code,
concerning its role as "alternate purchaser" under the LTSA, and that as a
result, MGRM repudiated the LTSA pursuant to provisions of the Illinois
Commercial Code. The complaint further alleged that the LTSA should be
terminated because its purpose has been frustrated and the performance has
become impossible.
On October 2, 1995, Shell unilaterally terminated its performance under
the LTSA and ceased delivering Caroline Condensate to the Indian Refinery. On
January 16, 1996, Shell filed an amended complaint, which adds a claim for
$10,000 in damages based upon alleged undercharges and other breaches of the
LTSA. Management believes the claim of Shell is without merit.
On December 12, 1995, IRLP sold the Indian Refinery to American Western
(see Note 3). As part of the sale, American Western assumed all liabilities and
expenses associated with the LTSA litigation. American Western is currently
pursuing this litigation against Shell.
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it to
MGTFC, including $10,828 of disputed amounts (the "Disputed Amount"). On the
same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10,000.
-48-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
c. Powerine transferred its claim with respect to the Disputed Amount to
the Company.
d. The claim with respect to the disputed Amount was submitted to
binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10,000 loan to the Company against the $10,000
note it issued to the Company as part of the MG Settlement, to the
extent the arbitrator decides the claim with respect to the Disputed
Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled and MG will still
owe the Company its $10,000 note (due October 14, 1997). If the arbitrator
settles the Disputed Amount entirely in MG's favor, the Company's note from MG
will be discharged. In such case the Company's future earnings will also be
adversely impacted since the Company has not recorded any reserve against the
note.
On September 8, 1995, the Company filed its Statement of Claim and
Memorandum. On December 6, 1995, MG filed its Notice of Defense and Response to
Claimant's Statement of Claim and Memorandum. The Company filed a reply on
February 14, 1996 and the parties are proceeding with discovery as to the amount
of damages. The Company expects the arbitration to be settled during the fourth
quarter of fiscal 1996.
In January 1996, MG did not pay interest on the $10,000 note when such
interest was due. As a result, the entire note is due to be paid to the escrow
account for the Powerine Arbitration. The Company has demanded that MG pay the
entire note.
Swap Agreement
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to
do so based on breaches of other agreements by MG and its affiliates. MGNG
disregarded IRLP's termination notice and sent IRLP a termination notice
alleging IRLP was the defaulting party and claiming approximately $1,200 of
losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's
assignee, filed a complaint in Delaware state court, claiming $1,356 plus
interest under the Swap Agreement. IRLP has answered the complaint. The
Company's management believes that IRLP has good defenses to that claim, expects
to prevail and expects to recover its $707 receivable.
NOTE 17 -- EMPLOYEE BENEFIT PLANS:
Prior to October 1, 1995, the Company did not sponsor any employee
benefit plans; however, employee benefit plans of the Company's consolidated
group were maintained by IRLP and Powerine. Effective October 1, 1995, the
Company adopted a 401(k) plan for its employees.
Defined Benefit Pension Plan:
IRLP established a defined benefit retirement plan (the "IRLP Retirement
Plan") commencing January 1, 1991. All employees of IRLP on January 1, 1991,
including officers, were eligible for benefits under the IRLP Retirement Plan
and all employees joining IRLP after January 1 were eligible after attaining
20.5 years of age and six months of service with IRLP. Beginning in the 1994
fiscal year, employees of Indian Powerine L.P. ("IPLP") were included in the
IRLP Retirement Plan.
The charge against discontinued operations for the years ended September
30, 1995, 1994 and 1993 was $889, $1,280, and $716, respectively.
-49-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Net periodic pension cost included the following components:
September 30,
-----------------------
1995 1994 1993
---- ---- ----
Cost of benefits earned during the period........ $866 $1,165 $694
Interest cost on projected benefit obligation.... 250 206 95
Actual return on assets.......................... (486) (185) (263)
Net amortization and deferral.................... 259 94 190
---- ------ -----
$889 $1,280 $716
==== ====== ====
Significant assumptions used in the actuarial calculations were as follows:
Discount rate............................... 7.25% 8.5% 7.0%
Rate of increase in compensation level..... 5.25% 6.0% 6.0%
Expected long-term rate of return on assets. 9.00% 9.0% 9.0%
A reconciliation of the plan's funded status to amounts included in the
consolidated balance sheet follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation......................................... ($2,288) ($ 19) ($ 20)
====== ======== ========
Accumulated benefit obligation.................................... ($2,543) ($1,416) ($1,108)
====== ====== ======
Projected benefit obligation...................................... ($4,782) ($3,085) ($2,421)
Plan assets at fair market value..................................... 3,519 1,857 1,401
------- ------- -------
Projected benefit obligation (in excess of) plan assets.............. (1,263) (1,228) (1,020)
Unrecognized net gain (loss)......................................... (118) (451) 229
Unrecognized prior service cost...................................... 40 44 163
------- --------- -------
Pension liability recognized in the consolidated balance sheets...... ($1,341) ($1,635) ($ 628)
====== ====== ======
</TABLE>
Employees are generally entitled to an annual retirement benefit based
on their average earnings. Plan assets were invested in money market funds and
short-term investments.
On December 12, 1995, the Indian Defined Benefit Pension Plan was
transferred to American Western (see Note 3). In addition, American Western
assumed all pension liabilities associated with the Plan. At September 30, 1995
such accrued pension liabilities aggregated $1,341.
-50-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Defined Contribution Plan
Powerine maintained a defined contribution plan (the "Powerine
Retirement Plan") for the majority of its employees. Powerine made contributions
to the retirement plan at the end of each plan year equal to 2.5 percent of each
participant's compensation equal to or less than the social security taxable
wage base ("Wage Base"), plus 5 percent of the participant's compensation in
excess of the Wage Base, subject to certain limitations. Contributions were
invested in various investments as directed by the Powerine Retirement Plan's
administrative committee, primarily combinations of common trust funds.
Powerine's contribution to the Powerine Retirement Plan and amounts charged to
discontinued operations for the years ended September 30, 1995 and 1994
approximated $531 and $484, respectively. On August 31, 1995, the Powerine
Retirement Plan was terminated.
401(k) Plans
IRLP
IRLP sponsored a tax savings 401(k) plan (the "IRLP 401(k) Plan") for
its employees. Employees hired prior to January 1, 1991 became eligible to
participate in the IRLP 401(k) Plan when hired. Employees hired during the
period from January 1, 1991 to January 31, 1991 became eligible to participate
in the IRLP 401(k) Plan on July 1, 1991 (if still employed). All employees hired
after January 31, 1991 became eligible to participate in the IRLP 401(k) Plan on
the January 1 immediately following the date on which the employee has completed
500 hours of eligible service in a six-month period. During fiscal 1994 the plan
was expanded to include employees of IPLP and the Company.
Employees participating in the IRLP 401(k) Plan could authorize IRLP to
contribute up to 15% of their gross compensation to the IRLP 401(k) Plan. IRLP
would match such voluntary employee contributions up to 3% of employee gross
compensation. Employees' contributions to the IRLP 401(k) Plan could not exceed
thresholds set by the Secretary of the Treasury. During the years ended
September 30, 1995, 1994 and 1993, the Company's and its subsidiaries'
contributions to the IRLP 401(k) Plan aggregated $480, $467 and $393,
respectively.
On December 12, 1995, the IRLP 401(k) Plan was transferred to American
Western (see Note 3).
Powerine
Powerine sponsored a 401(k) plan (the "Powerine 401(k) Plan") for the
majority of its employees. Under the terms of the plan, Powerine matched 50% of
the voluntary employee contributions to the plan up to a maximum of 6% of the
participant's compensation. Contributions were invested in various combinations
of common trust funds comprising the investment options available to and
directed by the participant. For the years ended September 30, 1995 and 1994,
Powerine's contributions to the plan were $380 and $282, respectively. Such
contributions were charged to discontinued operations. On August 31, 1995, the
Powerine 401(k) Plan was terminated.
Post Retirement Benefits
Neither the Company nor its subsidiaries provide any other post
retirement benefits to employees.
NOTE 18 -- STOCKHOLDERS' EQUITY
Effective November 18, 1992, the Company issued 300,000 shares of its
common stock to certain nominees of MGRM, including three individuals who were
at that time directors of the Company, in return for MGRM's agreeing to provide
performance assurances of IRLP's obligations in conjunction the LTSA (see Note
16).
-51-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
In connection with the May 1993 extension and restructuring of the
Indian Offtake Agreement, the Revolving Credit Facility, the Subordinated Note,
the MGTFC Credit Agreement and the provision by MG AG (see Note 15) and MG of
support agreements required by the senior lender under the Senior Facility, on
May 11, 1993, the Company issued to MG or its nominees 1 million shares of the
Company's common stock, 7-year warrants to purchase 1,975,000 shares of the
Company's common stock at a purchase price of $11.00 per share and a $5,500
convertible debenture with a maturity of December 31, 1996. The value of the
securities issued was based upon the estimated fair value of such securities,
was recorded as deferred assets and was amortized over the lives of the related
agreements.
On September 16, 1993, the Board of Directors of the Company authorized
a 1-for-2 reverse stock split which became effective November 12, 1993. All
share and per share amounts have been restated to give effect to the 1-for-2
reverse stock split.
On December 2, 1993, the Company consummated a public offering of its
common stock. Pursuant to the terms of the offering, the Company sold 2,800,000
shares of common stock to the public and 700,000 shares of common stock to MG at
a gross offering price of $15.00 per share. The offering resulted in aggregate
net proceeds to the Company of $48,178. Of such amount, $30,800 was used to pay
down various debt obligations of the Company owed to MGTFC. The remainder of
such amount was used for general corporate purposes. As a result of the
offering, MG's percentage ownership of the Company's common stock was reduced
from approximately 49% to approximately 41%. All treasury stock of the Company
was reissued in conjunction with the offering.
On April 21, 1994, the Board of Directors of the Company adopted a
Stockholder Rights plan under which one preferred stock purchase right has been
distributed for each outstanding share of the Company's common stock. Each right
initially entitles holders of common stock to buy one-hundredth of one share of
a new series of preferred stock at an exercise price of $35.00. The rights will
be exercisable only if a person or group, without the prior approval of the
Company's Board of Directors, acquires 15% or more of the outstanding common
stock or announces a tender offer as a result of which such person or group
would own 15% or more of the common stock. If a person to whom these provisions
apply becomes a beneficial owner of 15% or more of the outstanding common stock,
each right (other than rights held by such acquiring person) will also enable
its holder to purchase common stock (or equivalent securities) of the Company
having a value of $70.00 for a purchase price of $35.00. In addition, if the
Company is involved in a merger or other business combination with another
entity, at or after the time that any person acquires 15% or more of the
outstanding common stock, each right will entitle its holder to purchase, at
$35.00 per right, common shares of such other entity having a value of $70.00
On September 9, 1994, the Company acquired and cancelled 3,600,000
shares of its common stock from MG. On October 14, 1994, 969,000 shares of
common stock were surrendered by MG and cancelled by the Company, reducing MG's
ownership of the Company's common stock to zero. In addition, the convertible
debenture was cancelled and all warrants except for 22,500 warrants were
cancelled (see Notes 3 and 19).
The Company is currently precluded from paying dividends as a result of
restrictions under the Replacement Credit Facility (see Note 15). Such
restrictions will be removed once the Replacement Credit Facility lender is
repaid. In addition, both of the Company's natural gas marketing and
transmission subsidiaries are precluded from paying dividends to the Company
pursuant to provisions of the GECC loan.
-52-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 19 -- STOCK OPTIONS AND WARRANTS
Option and warrant activities during each of the three years ended
September 30, 1995 are as follows (in whole units):
<TABLE>
<CAPTION>
Non- Incentive
Incentive Qualified Plan Other
Warrants Options Options Options Options Total
-------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-September 30, 1992............. 20,000 101,000 302,500 55,000 478,500
Issued..................................... 1,975,000 7,500 195,000 45,000 2,222,500
Exercised.................................. (20,000) (7,500) (27,500)
Cancelled.................................. (98,500) (172,500) (7,500) (278,500)
Expired.................................... (20,000) (20,000)
---------- -------- --------- ------- ------- ---------
Outstanding-September 30, 1993............. 1,975,000 2,500 110,000 195,000 92,500 2,375,000
Issued..................................... 434,000 100,000 534,000
Exercised.................................. (5,000) (5,000)
Cancelled.................................. (100,000) (100,000)
Expired.................................... (1,055,000) (17,500) (41,666) (7,500) (1,121,666)
--------- -------- -------- -------- ---------- ---------
Outstanding-September 30, 1994............. 920,000 2,500 92,500 487,334 180,000 1,682,334
Issued..................................... 115,000 115,000
Exercised.................................. (35,000) (35,000)
Expired.................................... (897,500) (25,000) (58,500) (10,000) (991,000)
---------- --------- -------- -------- ------- ---------
Outstanding-September 30, 1995............. 22,500 2,500 67,500 543,834 135,000 771,334
========== ========= ======== ======= ======= =========
Reserved at September 30, 1995 22,500 2,500 67,500 562,500 135,000 790,000
========== ========= ======== ======= ======= =========
Reserved at September 30, 1994 920,000 2,500 92,500 562,500 180,000 1,757,500
========== ========= ========= ======= ======= =========
Exercisable at September 30, 1995.......... 0 2,500 67,500 284,627 128,333 482,960
========== ========= ========= ======= ======= =========
Become exercisable during fiscal year ended:
September 30, 1996...................... 139,707 6,667 146,374
September 30, 1997...................... 100,750 100,750
September 30, 1998...................... 18,750 18,750
------- --------- ----------
259,207 6,667 265,874
======= ========= ==========
Exercise prices at:
September 30, 1995...................... $11.00 $6.00 $6.00 $ 8.50- $11.00-
$14.25 $12.25
September 30, 1994...................... $11.00 $6.00 $6.00- $10.25 $ 5.75-
$8.50 $14.25 $12.25
September 30, 1993...................... $11.00 $6.00 $6.00- $12.25 $ 5.36-
$8.50 $11.00
Exercise Termination Dates.............. 2000 1997 1997 2005 2004
</TABLE>
Effective May 18, 1992, the Company's Board terminated the existing
stock plans. Unexercised options to purchase 205,000 shares of common stock
awarded under the prior plans continued to be governed by the terms of the prior
plans.
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.
-53-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The Incentive Plan provides that an aggregate of 562,500 shares of
common stock of the Company will be available for awards in the form of stock
options, including incentive stock options and nonqualified stock options
generally at prices at or in excess of market prices at the date of grant.
The Incentive Plan also provides that each outside director of the
Company will annually be granted an option to purchase 5,000 shares of common
stock at fair market value on the date of grant.
In conjunction with the MG Settlement, certain warrants were cancelled
(see Note 3). The remaining 22,500 warrants cannot be exercised without the
Company's consent. The Company intends to withhold its consent.
In addition to stock options and warrants, the Company has issued the
following stock appreciation rights:
<TABLE>
<CAPTION>
Measurement Price
------------------------------------------------------------------------------
$5.00 $6.00 $8.00 $12.50 $13.00 Total
----- ----- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-September 30, 1992............... 300,000 67,500 175,000 542,500
Issued....................................... 112,500 60,000 150,000 36,667 359,167
Exercised.................................... (6,667) (6,667)
Cancelled.................................... (87,500) (87,500)
--------- -------- ------- -------- ------ --------
Outstanding-September 30, 1993............... 300,000 180,000 140,833 150,000 36,667 807,500
Exercised.................................... (300,000) (67,500) (20,000) (387,500)
Cancelled.................................... (13,333) (13,333)
--------- -------- ------- -------- ------ -------
Outstanding-September 30, 1994............... -- 112,500 107,500 150,000 36,667 406,667
Exercised.................................... (112,500) (20,000) (132,500)
--------- ------- ------- ------- ------ -------
Outstanding-September 30, 1995............... -- -- 87,500 150,000 36,667 274,167
========= ======= ======= ======= ====== =======
</TABLE>
Subsequent to September 30, 1995, all 274,167 stock appreciation rights
outstanding at September 30, 1995 were cancelled in return for severance
payments to officers of IRLP.
The stock appreciation rights entitled the holder to cash compensation
equal to the difference between the price per share of the Company's common
stock and the measurement price with respect to the number of rights issued,
subject to adjustment. Costs associated with stock appreciation rights were
recorded over the relevant period of employment. During the years ended
September 30, 1995, 1994 and 1993, the Company recorded (income) expense related
to stock appreciation rights of ($1,162),$4,848 and $2,268, respectively.
NOTE 20 -- INCOME TAXES
Provisions for (benefit of) income taxes consist of:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision for (benefit) income taxes:
Current:
Federal.............................................................. $ 1,852 $ 2,877 $ 3,006
State................................................................ 22 549
Deferred:
Federal.............................................................. 20,157 28,702 4,216
State................................................................ 2,532 (14,827) 903
Adjustment to the valuation reserve for deferred taxes:
Federal.............................................................. 29,415 (34,701) (38,874)
State................................................................ 3,695 17,926 (5,221)
-------- -------- ---------
$57,673 $ 526 ($35,970)
======= ========= =======
Intraperiod tax allocation of tax provision (recovery):
Continuing operations.................................................... $37,823 ($17,077) ($44,081)
Discontinued operations.................................................. 19,850 17,603 8,111
-------- -------- ---------
$57,673 $ 526 ($35,970)
======= ========== =======
</TABLE>
-54-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The intraperiod tax allocation was made pursuant to FAS 109.
Deferred tax assets (liabilities) are comprised of the following at
September 30, 1995 and 1994:
<TABLE>
<CAPTION>
September 30,
----------------------
1995 1994
---- ----
<S> <C> <C>
Operating loss and other tax carryforwards................................................... $23,786 $65,467
Depletion accounting......................................................................... (1,398) (814)
Depreciation................................................................................. (6,232) (29,327)
Amortization (gas contracts)................................................................. 2,553 3,369
Discontinued net refining assets, including environmental.................................... 18,557 11,586
Installment sale accounting.................................................................. (4,000)
Other........................................................................................ (3,107) 2,621
-------- --------
30,159 52,902
Valuation allowance.......................................................................... (33,110)
------- -------
($ 2,951) $52,902
======== =======
Deferred tax assets - current................................................................ $ 4,623 $68,088
Deferred tax liabilities - non-current....................................................... (7,574) (15,186)
--------- -------
($ 2,951) $52,902
======== =======
</TABLE>
Upon adoption of FAS 109, the Company recorded an asset of $73,909 and
provided a valuation reserve against the asset of $65,395. During fiscal 1993,
the Company reduced the valuation reserve based upon the Company's entering into
certain long-term purchase and sale commitments, refinancing its debt and the
related earnings projections. At September 30, 1994, the Company adjusted its
valuation reserve such that the remaining deferred tax assets approximated the
net tax benefit that the Company expected to realize from its net operating loss
carryforwards as a result of the gain realized from the MG Settlement (See Note
3). As a result of unanticipated delays and larger than expected losses in the
sale of its refineries, the Company did not realize all of its tax
carryforwards. As a result, the Company provided a $31,955 valuation reserve at
December 31, 1994 which was subsequently adjusted to a $33,110 valuation reserve
at September 30, 1995.
The income tax provision (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate....................................................... $25,400 $13,805 $ 8,174
State taxes, net of federal benefit......................................... 4,063 2,371 1,081
Non-deductible goodwill amortization........................................ 1,855 311
Change in tax rate.......................................................... (1,130)
Changes in prior year's estimates........................................... (6,847)
Changes in valuation allowance.............................................. 33,110 (16,775) (44,095)
Other....................................................................... 92 814
------- -------- ---------
$57,673 $ 526 ($35,970)
======= ======== =======
</TABLE>
The tax provision (benefit) applicable to discontinued operations -
refining differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:
-55-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes - discontinued operations - refining...... $60,787 $40,180 $20,446
======= ======= =======
Tax at statutory rate....................................................... $21,275 $14,063 $ 7,163
State taxes, net of federal benefit......................................... 3,403 2,416 948
Non-deductible goodwill amortization........................................ 1,855 311
Change in prior year's estimate............................................. (6,847)
Other....................................................................... 164 813
------- ---------- --------
$19,850 $17,603 $ 8,111
======= ======= ========
</TABLE>
At September 30, 1995, the Company had the following tax carryforwards
available:
Federal Tax
---------------------------
Alternative
Minimum
Regular Tax
------- -------------
Net operating loss................... $39,459 $48,972
Alternative minimum tax credits...... $ 2,650 N/A
Statutory depletion.................. $12,364 $12,364
Investment tax credit................ $ 414 N/A
The net operating loss and investment tax credit carryforwards expire
from 1996 through 2008. Of the Company's net operating losses, approximately
$24,881 (approximately $23,536 for alternative minimum tax purposes) are
applicable to subsidiaries acquired by the Company and may only be used to
offset future taxable income of the acquired companies which generated the loss.
Similar restrictions apply to all of the Company's investment tax credit
carryforwards and approximately $9,000 of the Company's statutory depletion
carryforwards.
On September 9, 1994, the Company experienced a change of ownership for
tax purposes. As a result of such change of ownership, the Company's net
operating loss became subject to an annual limitation of $7,845. Such annual
limitation, however, is increased by the amount of net built in gain at the time
of the change of ownership. Such net built-in gain approximates $191,552. During
fiscal 1995, the Company utilized $116,236 of its net operating loss, including
$108,391 of built-in gain, to offset the gain from the MG Settlement (see Note
3).
The Company also has approximately $35,750 in individual state tax loss
carryforwards available at September 30, 1995. Such carryforwards are primarily
available to offset taxable income apportioned to certain states in which the
Company previously incurred refining losses and currently has only minor
operations and no current plans for future operations.
NOTE 21 -- RELATED PARTIES
During the fiscal year ended September 30, 1994 and 1993, the Company
conducted several transactions with its principal shareholder, MG, and its
subsidiaries. As a result of the MG Settlement on October 14, 1994, MG's
ownership of the Company was reduced to zero and MG was thereafter no longer a
related party. The following summarizes the MG subsidiaries with which the
Company and its affiliates conducted transactions, and the nature and dollar
amount of such related party transactions.
-56-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
The MG affiliates and subsidiaries which the Company engaged in
transactions were as follows:
Metallgesellschaft Corp. A.G. ("MG AG"), German parent
Metallgesellschaft Corp. ("MG"), U.S. subsidiary
MG Refining and Marketing, Inc. ("MGRM"), U.S. subsidiary
MG Trade Finance Corp. ("MGTFC"), U.S. subsidiary
MG Futures, Inc. ("MGF"), U.S. subsidiary
MG Natural Gas Corp. ("MGNG"), U.S. subsidiary
MG Gathering Corp ("MGG"), U.S. subsidiary
MGPC Petcoke, Inc. ("MG Petcoke"), U.S. subsidiary
All of the above U.S. subsidiaries are directly or indirectly
wholly-owned by MG which, in turn, is indirectly owned by MG AG.
The fiscal 1993 and 1994 transactions with MG and its affiliates are as
follows:
<TABLE>
<CAPTION>
Dollar Volume of
Transaction Year Ended
Parties September 30,
------------------------------ ----------------------------
Company MG Description 1994 1993
-------------- ------ ----------- ---- ----
<S> <C> <C> <C> <C>
IRLP MGTFC Interest paid by IRLP to MGTFC on $1,147 $1,537
MGTFC Subordinated Note.
IRLP, IPLP MG Payments by IRLP and IPLP to MG for $50,257 $527,300
crude oil and feedstock supply.
IRLP, IPLP & Powerine MG Payments of fees to MG with respect to $2,614 $1,415
feedstock supply and credit agreements.
IRLP MGRM Payments by MGRM to IRLP under swap $3,082 $18
(hedging) agreement with respect to crude
oil.
Powerine MGRM Payments by Powerine to MGRM for the $47,129
supply of crude and oil.
Powerine MG Petcoke Payment by MG Petcoke to Powerine for $2,516
purchase of coke.
Pipeline & Marketing MGTFC Payment by Pipeline and Marketing of a $3,206
syndication fee for a loan to purchase the
ARCO properties.
Castle Energy Corporation MGTFC Payment by the Company of interest on $7,734
credit agreement loan.
IRLP MGTFC Payment by IRLP to MGTFC for lease $85 $109
catalyst costs.
IRLP MGTFC Payment by IRLP to MGRM for natural $8,462 $7,260
gas supplies.
</TABLE>
-57-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Dollar Volume of
Transaction Year Ended
Parties September 30,
------------------------------ -------------------------
Company MG Description 1994 1993
-------------- ------ ----------- ---- ----
<S> <C> <C> <C> <C>
IRLP, IPLP & Powerine MGF Payments by IRLP and Powerine to MGF $292 $622
for brokerage services for hedging
activities.
IRLP MGRM Payments received by IRLP for sales of $498,225 $525,690
refined products to MGRM under the
Indian Offtake Agreement.
Powerine MGRM Payments received by Powerine for sales $348,751
of refined products to MGRM under
Powerine Offtake Agreement.
IRLP MGRM Payments by MGRM to IRLP for IRLP's $11,899 $6,320
operating the Indian Refinery at less than
full capacity.
Pipeline MGG Pipeline paid MGG for pipeline manage- $148 $120
ment services.
Marketing MGNG Marketing paid MGNG for gas marketing $240 $195
services.
Marketing MGNG Marketing paid MGNG for gas supplies $31,069 $21,519
under a long-term gas supply agreement
</TABLE>
In addition to the above-related party transactions with MG and its
affiliates, the Company undertook the following related party transactions:
Sale of Subsidiaries
On March 31, 1993, the Company entered into an agreement to sell to
Terrapin its oil and gas partnership management businesses for $1,100 ($800 note
bearing interest at 8% per annum and $300 cash) which approximated book value.
The closing of the stock purchase transaction occurred on June 30, 1993.
Terrapin is wholly-owned by a former officer and director of the Company. In
November 1994, this former officer and director rejoined the Company as an
officer. In December 1994, the note was repaid.
In conjunction with the sale of its partnership management business,
the Company and Production entered into two management agreements with Terrapin
to manage its exploration and production operations. Management fees incurred to
Terrapin for the years ended September 30, 1995, 1994 and 1993 aggregated $579,
$584 and $203, respectively.
Purchase of IRLP Interests
During 1993, the Company acquired the partnership units of IRLP it did
not already own. Certain of these units were acquired from an officer of the
Company for an aggregate of 262,500 stock appreciation rights, entitling the
holder to cash compensation equal to the difference between the price per share
of the Company's common stock and stated prices. In November 1994, 112,500 stock
appreciation rights were exercised for $1,026 and the remaining 150,000 stock
appreciation rights were surrendered as part of the Company's severance
agreement with the officer for $500.
-58-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
Professional Fees
An officer of the Company is also a partner in a law firm which served
as general counsel to the Company. Legal fees incurred by the Company to this
firm during the years ended September 30, 1995, 1994 and 1993 were $2,593,
$5,101 and $1,343, respectively. On June 5, 1995, the officer resigned.
A member of the Board of Directors is also a partner in a law firm
which currently serves as general counsel for the Company. Legal fees paid by
the Company to this firm during fiscal 1995 and 1994 approximated $1,225 and
$806, respectively. On October 6, 1995, the partner in the law firm resigned as
a director of the Company.
Loan to Officer
On February 26, 1993, an officer of a subsidiary of the Company was
loaned $250. The principal amount of the loan was due and payable in full on the
earlier of January 31, 1996 or the termination of the officer's employment. The
loan accrued interest at the prime rate in effect on the date of the loan as
adjusted each January 1. The officer terminated his employment on December 22,
1995. The loan and accrued interest was offset against compensation due to the
officer as part of the officer's severance. In addition, the officer surrendered
all stock appreciation rights which he held.
CORE, Inc.
In the first quarter of fiscal 1995, the Company decided to dispose of
its refining operations. During the period from October 14, 1994 to September
29, 1995, the Company financed three attempts to sell one or both of its
refineries to CORE, Inc. ("CORE") (previously SIPAC, Inc.). CORE is wholly-owned
by a director of the Company. The director was also the President and Chief
Operating Officer of the Company until January 1996. Pursuant to several
agreements with CORE, the Company agreed to reimburse CORE for certain expenses
incurred by CORE in attempting to raise financing for a management buyout of one
or both of the Company's Refineries. Such agreements with CORE also provided
that the Company would be reimbursed for most of such funding should CORE
succeed in raising financing. In September 1995, the third CORE attempt to
obtain financing for the management buyout failed. During the year ended
September 30, 1995, the Company recorded $3,768 of expenses related to CORE. The
Company is not responsible for any CORE expenses incurred after September 29,
1995.
Payment of Legal Fees for Former Director
In conjunction with the MG Settlement, the Company paid legal fees
incurred by a director of the Company. For the years ended September 30, 1995
and 1994, such fees were $327 and $191, respectively. The director resigned in
June 1995.
NOTE 22 - BUSINESS SEGMENTS
Prior to August 14, 1989, when the Indian Refinery was acquired, the Company
was involved in only one business segment, the exploration for and the
production of oil and gas and administration of related oil and gas
partnerships. Upon the acquisition of the Indian Refinery in August 1989, the
Company became engaged in an additional business segment, refining. This segment
had no operations until October 1, 1990. On December 3, 1992, the Company
entered a third segment of the petroleum business - natural gas marketing. The
Company disposed of its partnership administration business in June 1993 but
continued its exploration and production business. As a result of the foregoing,
the Company operated in three segments of the petroleum business during the
fiscal years ended September 30, 1993, 1994 and 1995 - refining, natural gas
marketing and exploration and production. As of September 30, 1995, the Company
disposed of its refining segment (see Note 3).
-59-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended September 30, 1995
--------------------------------------------------------------------------------------
Oil & Gas Eliminations
Natural Exploration and
Gas and Refining Corporate
Marketing Production (Discontinued) Items Consolidated
--------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $74,675 $ 9,197 ($ 4,273) $ 79,599
Operating income (loss)............ 16,867 2,991 (4,995) 14,863
Identifiable assets................ 72,724 25,272 18,908 116,904
Capital expenditures............... 47 4,022 $35,355 4 39,428
Depreciation, depletion and
amortization.................... 11,385 2,770 77 14,232
Year Ended September 30, 1994
--------------------------------------------------------------------------------------
Oil & Gas Eliminations
Natural Exploration and
Gas and Refining Corporate
Marketing Production (Discontinued) Items Consolidated
--------- ---------- -------------- ------------ ------------
Revenues........................... $66,424 $ 8,552 ($ 5,165) $ 69,811
Operating income (loss)............ 10,643 2,402 (5,499) 7,546
Identifiable assets................ 80,560 19,714 $469,149 77,068 646,491
Capital expenditures............... 21 956 218,088 346 219,411(1)
Depreciation, depletion and
amortization.................... 11,360 2,092 66 13,518
- ----------------
(1) Includes $152,945 of additions related to the acquisition of Powerine.
Year Ended September 30, 1993
--------------------------------------------------------------------------------------
Oil & Gas Eliminations
Natural Exploration and
Gas and Refining Corporate
Marketing Production (Discontinued) Items Consolidated
--------- ---------- -------------- ------------ ------------
Revenues........................... $62,572 $10,124 ($ 5,896) $ 66,800
Operating income (loss)............ 10,866 3,244 (2,191) 11,919
Identifiable assets................ 89,965 20,161 $230,647 51,965 392,738
Capital expenditures............... 27,909 13,592 35,695 77,196
Depreciation, depletion and
amortization.................... 9,495 2,696 30 12,221
</TABLE>
-60-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
NOTE 23 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Temporary Investments -- For those short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Note receivable - MG - at September 30, 1995, the Company had the
following long-term note receivable:
Note - MG $10,000 8%
The Company believes the interest rate on the note approximates the
market value given the guarantee of the note by MG AG.
Debt -- At September 30, 1995, the Company had the following debt with
interest rates which were fixed:
GECC Loan................................. $33,196 8.33%
The Company has recently conducted negotiations with prospective lenders
and has ascertained that an interest rate of approximately 10% would have been
likely if the Company were to have refinanced the GECC Loan at September 30,
1995. Accordingly, the estimated fair market value of the GECC Loan at September
30, 1995, based upon an interest rate of 10%, and anticipated future cash flows
is $32,688.
All other debt is at rates tied to market indices and is considered to be
stated at fair value.
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 24 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following information has been restated to reflect the discontinuance
of refining operations, retroactively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(December 31) (March 31) (June 30) (September 30)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Revenues....................................... $22,414 $22,915 $20,766 $13,504
Operating income before interest and income
taxes....................................... 4,784 5,253 4,383 443
Net income (loss).............................. 14,084 36 (1,873) 2,650
Net income (loss) per share.................... $ 1.97 $ 0.01 ($ 0.28) $ .39
</TABLE>
See Note 3 for a discussion of the first quarter gain on the MG
Settlement and the quarterly adjustments to the carrying value of net refining
assets. Changes in the valuation reserve for deferred tax assets are discussed
in Note 20.
The sum of the quarterly per share amounts ($2.09) differs from the
annual per share amount ($2.20) primarily because of the 969,000 shares of the
Company's common stock acquired on October 14, 1994 as part of the MG
Settlement (see Note 3).
-61-
<PAGE>
Castle Energy Corporation
Notes to Consolidated Financial Statements
("000's" Omitted Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(December 31) (March 31) (June 30) (September 30)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Fiscal 1994:
Revenues....................................... $18,576 $20,668 $12,556 $18,011
Operating income before interest and income
taxes....................................... $ 2,863 $ 3,782 ($ 489) $ 1,390
Net income..................................... $ 8,383 $ 6,699 $ 4,345 $19,490
Net income per share........................... $ 0.82 $ 0.56 $ 0.37 $ 1.73
</TABLE>
Net income for the quarter ended September 30, 1994 increased $16,775
because of a decrease in the Company's valuation reserve against the deferred
tax assets. The decrease resulted from the recognition of additional tax
benefits arising from the anticipated utilization of net operating losses and
other tax carryforwards to offset taxable income derived from the MG Settlement.
NOTE 25 - SUBSEQUENT EVENTS
On December 12, 1995, IRLP sold the Indian Refinery and related
equipment to American Western (see Note 3).
On January 16, 1996, Powerine merged into a subsidiary of EMC (see
Note 3).
In December 1995, the Company received $2,725 from a plaintiff class
escrow fund related to stockholder litigation. The parties reached a settlement
with respect to the stockholder litigation in October 1994. The proceeds to the
Company represent unclaimed funds that were to revert to the Company pursuant
to the Settlement Order for the litigation.
Subsequent to September 30, 1995, the Company entered into a swap
agreement to hedge its natural gas sale commitment to MGNG (see Note 16).
On March 5, 1996, the Company engaged an investment banking firm to
explore strategic alternatives to enhance stockholder value and to act as the
Company's exclusive advisor. The alternatives that may be recommended include
the sale of assets, the sale of the Company, a merger with or joint venture with
another company or other restructuring measures. If such is the case, future
operations of the Company may be different from that contemplated herein.
As discussed in Note 15, all of the cash flow generated by Pipeline and
Marketing is dedicated to the repayment of the GECC loan. As a result, until the
GECC loan is liquidated, cash flow from operations will not be sufficient to
satisfy the Company's obligations. Accordingly, on March 14, 1996 the Company
entered into a $3,800 credit commitment with a financial institution. Funds
borrowed will be secured by the Company's exploration and production assets. The
Company believes that the funds borrowed under the terms of this facility will
allow it to satisfy its obligations during the next twelve months.
-62-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
The following represents the financial position, statements of
operations and statements of cash flows for Castle Energy Corporation, the
parent company, as of September 30, 1995, 1994 and 1993 and for the three
periods then ended.
CASTLE ENERGY CORPORATION
CONDENSED BALANCE SHEETS
("000's" Omitted, except share amounts)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1995 1994 1993
--------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.................................................................... $ 6,067 $ 9,729 $ 409
Accounts receivable..................................................... 2,673 858
Deferred taxes.......................................................... 4,623 68,088 14,520
Other assets............................................................ 140 11 144
--------- ---------- ----------
Total current assets............................................. 10,830 80,501 15,931
Deferred income taxes...................................................... 34,595
Intercompany advances...................................................... 8,486 44,449
Other assets............................................................... 300 385 1,452
--------- ---------- ----------
Total assets..................................................... $11,130 $ 89,372 $ 96,427
========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion - long-term debt........................................ $ 2,750
Accounts payable and accrued expenses................................... 7,337 $ 4,908 $ 2,783
Income taxes payable.................................................... 507 86 3,006
--------- ---------- ----------
Total current liabilities........................................ 10,594 4,994 5,789
Accumulated losses of subsidiaries in excess of investments:
Exploration and production.......................................... (9,650) (9,402) (9,513)
Refining (discontinued)............................................. (39,996) 2,798 70,301
Natural gas transmission and marketing.............................. (34,462) (8,825) (4,738)
CEC, Inc. .......................................................... 759
Long-term debt, including intercompany debt............................. 34,674 42,875 42,875
Other liabilities....................................................... 1,100
Deferred income taxes................................................... 7,574 19,012
--------- ---------- ----------
Total liabilities................................................ (30,507) 51,452 105,814
--------- ---------- ----------
Stockholders' equity:
Series B participating preferred stock; par value - $1.00;
10,000,000 shares authorized; no shares issued
Common stock, $.50; 25,000,000 shares authorized;
6,693,646, 7,627,646 and 7,722,646 shares issued and
outstanding in 1995, 1994 and 1993, respectively.................... 3,347 3,814 3,891
Additional paid-in capital.............................................. 66,316 73,490 65,387
Accumulated deficit..................................................... (28,026) (39,384) (78,301)
--------- ---------- ----------
41,637 37,920 (9,023)
Treasury stock - at cost (59,860 shares in 1993)........................ (364)
--------- ---------- ----------
41,637 37,920 (9,387)
--------- ---------- ----------
Total liabilities and stockholders' equity (deficit)............. $11,130 $ 89,372 $ 96,427
========= ========== ==========
</TABLE>
-63-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED
CONDENSED STATEMENTS OF OPERATIONS
("000's" Omitted)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas sales....................................................... $ 9 $ 15 $ 12
Management fees......................................................... 3,640 4,956 1,414
Interest/dividend income................................................ 5,352 3,354 2,426
-------- -------- --------
9,001 8,325 3,852
-------- -------- --------
Costs and expenses:
General and administrative.............................................. 6,820 10,631 2,265
Oil and gas production.................................................. 6 6 4
Interest expense........................................................ 3,633 2,608 2,124
Depreciation, depletion and amortization................................ 77 66 30
Other................................................................... 1,909 541
-------- ------- -------
12,445 13,852 4,423
-------- ------- -------
Income (loss) before equity in undistributed earnings (losses) of
subsidiaries and income taxes........................................... (3,444) (5,527) (571)
Equity in undistributed earnings (losses) of subsidiaries:
Exploration and production............................................ 248 (111) 1,341
Refining (discontinued)............................................... 44,866 38,537 17,865
Natural gas transmission and marketing................................ 25,636 4,087 4,718
CEC, Inc. ............................................................ 759
-------- -------- -------
68,065 36,986 23,353
Provision for (recovery of) income taxes.............................. 53,168 (1,931) (35,970)
-------- -------- -------
Net income (loss) before cumulative effect of change in accounting
principle........................................................... 14,897 38,917 59,323
Cumulative effect of a change in accounting principle - adoption of
FAS 109............................................................. 8,514
------- ------- -------
Net income ........................................................... $14,897 $38,917 $67,837
======= ======= =======
</TABLE>
-64-
<PAGE>
SCHEDULE III
CASTLE ENERGY CORPORATION
(PARENT)
CONDENSED STATEMENT OF CASH FLOWS
("000's" Omitted)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before equity in undistributed earnings of subsidiaries and
cumulative effect of a change in accounting,
includes (provisions for) recovery of income taxes................... ($56,613) ($ 3,596) $ 35,399
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization............................. 77 66 30
Deferred income taxes................................................ 52,027 39 (38,976)
Changes in assets and liabilities:
(Increase) in accounts receivable.................................... 2,673 (1,815)
(Increase) decrease in other assets.................................. (129) 1,482 (1,342)
Increase (decrease) in accounts payable and accrued expenses......... 2,850 (795) 5,652
(Decrease) in other liabilities...................................... (1,100) (55)
--------- --------- --------
Total adjustments................................................. 57,498 (2,123) (34,691)
--------- --------- --------
Net cash flows provided by (used in) operating activities......... 885 (5,719) 708
--------- --------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Proceeds from disposal of fixed assets .................................. 10
Purchase of furniture, fixtures and equipment............................ (3) (348) (40)
Business acquisition, net of cash acquired............................... (8,230)
--------- --------- --------
Net cash provided by (used in) investing activities............... 7 (8,578) (40)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net.............................. 202 48,207 20
Proceeds of sale of subsidiaries......................................... 265
Loan from shareholder.................................................... 250
Purchase of treasury stock............................................... (175)
Investment in subsidiaries............................................... 3,590 (17,300)
Intercompany (advances) loans............................................ (8,346) (7,290) (654)
--------- --------- --------
Net cash provided by (used in) financing activities............... (4,554) 23,617 (294)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........................ (3,662) 9,320 374
Cash and cash equivalents - beginning of period............................. 9,729 409 35
--------- --------- --------
Cash and cash equivalents - end of period .................................. 6,067 $ 9,729 $ 409
========= ========= ========
Supplemental schedule of noncash investing and financing activities:
Purchase of Powerine Oil Company:
Basis in assets acquired............................................. $ 186,867
Cash paid for capital stock and transaction costs.................... (8,230)
---------
Basis in liabilities assumed...................................... $ 178,637
=========
Exchange of common stock:
Fair value of debt issuance/extension, processing agreement, issuance
costs, and offtake amendments........................................ $ 11,000
========
Acquisition of common stock in exchange for reduction in cash
participations....................................................... $ 39,817
=========
Debt issued in exchange for debt extensions and offtake amendments.......... $ 5,500
========
Stock issued in exchange for support of supply agreement.................... $ 855
========
Sale of properties for note................................................. $ 600
========
Options exercised for short-term receivable................................. $ 45
========
Transactions with subsidiaries:
Investment in IRLP....................................................... $ 17,355
========
Investment in natural gas marketing and transmission..................... $ 20
========
Investment in exploration and production................................. $ 10
========
Transfer third party debt from Subsidiary to Parent...................... $ 37,125
========
</TABLE>
-65-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors
CASTLE ENERGY CORPORATION
We have audited the consolidated financial statements of Castle Energy
Corporation ("Company") listed in the accompanying index. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and 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 audited by us
present fairly, in all material respects, the financial position of Castle
Energy Corporation and its subsidiaries at September 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As described in Notes 1, 3, 15, 16, 18 and 21 to the consolidated
financial statements, prior to the Company's settlement with Metallgesellschaft
Corp. ("MG") in October 1994, extensive agreements, transactions and
relationships existed between the two companies and their affiliates. In
addition, MG was a significant shareholder of the Company. As a result of these
relationships, the Company had been heavily reliant upon MG and its affiliates
in the conduct of its refining operations and for its continued viability. The
October 1994 settlement with MG significantly amended or terminated the
relationship between the Company and its affiliates and MG and its affiliates
and resulted in a $391 million gain. In 1995, the Company decided to discontinue
its refining business and recorded a $323 million write down to reflect the
estimated realizable value of its discontinued net refining assets. The
Company's continuing business consists of natural gas marketing and transmission
and oil and gas exploration and production and includes a long-term natural gas
sales agreement with Lone Star Gas Company ("Lone Star Agreement").
Approximately 95% of its 1995 revenues from continuing operations were generated
from the Lone Star Agreement.
On March 14, 1996, the Company obtained a $3.8 million credit
commitment from a financial institution. Funds borrowed will be secured by the
Company's exploration and production assets. As described in Note 25, the
Company believes that funds borrowed under the terms of this commitment will
allow it to satisfy its obligations during the next twelve months. Also, as
discussed in Note 25, on March 5, 1996, the Company engaged an investment
banking firm to explore strategic alternatives to enhance stockholder value and
to act as the Company's exclusive advisor.
As discussed in Note 2, the Company changed its method of accounting
for income taxes effective October 1, 1992.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 14, 1996
-66-
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements on any matter of accounting principles
or financial statement disclosure with the Company's independent accountants
during the fiscal years ended September 30, 1995, 1994 or 1993.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Directors and executive officers of the Company and its significant
subsidiaries are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Directors of the Company
- ------------------------
Joseph L. Castle II .................... 63 Chairman of the Board and Chief Executive Officer of the
Company
William S. Sudhaus...................... 47 Director
Sidney F. Wentz......................... 63 Director
Martin R. Hoffmann...................... 63 Director
Executive Officers of the Company
- ---------------------------------
Richard E. Staedtler.................... 51 Senior Vice President, Chief Financial Officer and Chief
Accounting Officer of the Company
Steven J. Grenfell...................... 31 Treasurer and Controller of the Company
Executive Officers of Significant
- ---------------------------------
Subsidiaries of the Company
- ---------------------------
Ryk J. Holden........................... 37 President of CEC Gas Marketing L.P. ("Marketing"), a wholly-
owned subsidiary of the Company
Harold W. Hawkins....................... 45 President of Castle Texas Pipeline L.P. ("Pipeline"), a wholly-
owned subsidiary of the Company
Timothy M. Murin........................ 40 President of Castle Texas Production L.P. ("Production") and
Castle Exploration Company, Inc ("CECI"), wholly-owned
subsidiaries of the Company
</TABLE>
A description of the business experience of each of the directors,
executive officers of the Company and executive officers of significant
subsidiaries of the Company is as follows:
Directors of the Company
Joseph L. Castle II has been a Director of the Company since 1985. Mr.
Castle is the Chairman of the Board of Directors and Chief Executive Officer of
the Company, having served as Chairman from December 1985 through May 1992 and
since December 20, 1993. Mr. Castle also served as President of the Company from
December 1985 through December 20, 1993 when he reassumed his position as
Chairman of the Board. Mr. Castle has worked in the energy industry in various
capacities since 1971. Mr. Castle is a director of The Reading Company, Comcast
Corporation, Charming Shoppes, Inc. and Mark Centers Trust, a real estate
investment trust.
William S. Sudhaus has been a director of the Company since February
1993. Mr. Sudhaus served as Executive Vice President of the Company since
February 1993 and as President and Chief Operating Officer of the Company since
December 1993. In addition, Mr. Sudhaus served as the Chairman and Chief
Executive Officer of Indian Refining Limited Partnership ("IRLP"). Mr. Sudhaus
-67-
<PAGE>
also served as Chairman and Chief Executive Officer of Powerine Oil Company
("Powerine") from October 1993 to February 1995. Effective January 1, 1996, Mr.
Sudhaus resigned from all positions with the Company and its subsidiaries except
that of director of the Company. Mr. Sudhaus was also the Chairman and Chief
Executive Officer of CORE Refining Corporation ("CORE") from March 1995. See
"Certain Relationships and Related Transactions."
Sidney F. Wentz has been Chairman of the Board of The Robert Wood
Johnson Foundation, the nation's largest health care philanthropy, since June
1989. Commencing in 1967, he held several positions with Crum and Forster, an
insurance holding company, retiring as Chairman and Chief Executive Officer in
1988. Previously, he was 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
Ace Limited, a Bermuda-based insurance company, and a trustee for Morristown
Memorial Hospital and Drew University.
Martin R. Hoffmann has been a Senior Visiting Fellow at the Center for
Technology, Policy and Industrial Development of the Massachusetts Institute of
Technology since 1993 and a private business consultant since 1993. From 1989 to
1993, Mr. Hoffmann served as Vice President and General Counsel of Digital
Equipment Corporation. Prior to assuming this position, Mr. Hoffmann practiced
law as Managing Partner of the Washington, D.C. office of Gardner, Carton and
Douglas from 1977 to 1989. 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. Mr. Hoffmann is also currently of
counsel to the law firm of Skadden, Arps, Slate, Meagher & Flom.
Executive Officers of the Company
Richard E. Staedtler has been Senior Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Staedtler 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, when he formed Terrapin Resources
Corp. ("Terrapin") to purchase Minden Energy Corporation, then a wholly-owned
subsidiary of the Company. Mr. Staedtler also serves as President of Terrapin,
which provides certain administrative services to the Company. See "Certain
Relationships and Related Transactions -- Transactions with Management and
Others."
Steven J. Grenfell has been Controller and Treasurer of the Company
since January 1996. From August 1993 to December 1995, Mr. Grenfell served as
Assistant Controller of the Company. From July 1992 to August 1993, Mr. Grenfell
served as Controller of Technology Service Group, Inc. From September 1986 to
July 1992, Mr. Grenfell was employed by Price Waterhouse LLP as a staff
accountant, senior accountant and manager.
Executive Officers of Significant Subsidiaries of the Company
Ryk J. Holden is President of Marketing, a wholly-owned subsidiary of
the Company engaged in gas marketing and gas merchant activities. Mr. Holden
became President of Marketing in January 1995. From February 1993 until January
1995, Mr. Holden was a Vice President of Business Development and Supply of MG
Natural Gas Corp. ("MGNG"), a subsidiary of Metallgesellschaft Corp. ("MG") and
President of MG Gathering Corp. ("MGG"), an indirect subsidiary of MG. (See
"Certain Relationships and Related Transactions.") From December 1987 through
January 1993, Mr. Holden held various positions with ENRON Corp.
Harold W. Hawkins became President of Pipeline in July 1995. From
December 1992 until July 1995, Mr. Hawkins was the Manager of Operations for
MGG. (See "Certain Relationships and Related Transactions.") From 1972 until
1993, Mr. Hawkins was employed in various supervisory roles by Atlantic
Richfield Company ("ARCO").
Timothy M. Murin has been the President of Production since December
1995 and has been the President of CECI since June 1993. From August 1986 to
June 1993, Mr. Murin served as the Vice President - Exploration and Production
of CECI.
SECTION 16 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.
-68-
<PAGE>
Based solely on a review of the copies of the reports which the Company
received and written representations from certain persons, the Company believes
that, except as set forth below, all such reporting persons complied with such
requirements:
W. Arthur Benson, a director of the Company until June 5, 1995, did not
file a Form 4 report with respect to four transactions in June and July 1995,
which transactions have since been reported on a Form 5.
Richard E. Staedtler, the Company's Chief Financial Officer, was
approximately three months late in filing a Form 5 for fiscal 1995 reporting one
exempt grant of options.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes all compensation earned by the Named
Executives for the Company's fiscal years ending September 30, 1993, 1994 and
1995. It should be noted that Messrs. Sudhaus, Wright, Gualtieri, and Hermes
were all executive officers of one or more of the Company's refining
subsidiaries during the three year period ending September 30, 1995. In
addition, Mr. Sudhaus was the Chief Operating Officer of the Company from
February 1993 until January 3, 1996. As of September 30, 1995, the Company had
discontinued all refining operations. Mr. Wright resigned from all his positions
with the Company's subsidiaries as of December 22, 1995. Messrs. Gualtieri and
Hermes resigned from all their positions with the Company's subsidiaries
effective December 31, 1995, as did Mr. Sudhaus, effective January 1, 1996. Mr.
Sudhaus did, however, continue as a director of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
------------
Securities
Annual Compensation Underlying All Other
Fiscal -------------------- Options/ Severance Compensation
Name and Principal Position Year Salary($) Bonus($) SARs(#) (3) ($)
- ----------------------------- ------ --------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Castle II.............. 1995 $415,625 $ 59,375
Chairman of the Board, 1994 416,667 285,000 $ 6,000(1)
Chief Executive Officer and 1993 300,000 $ 32,500 9,000(1)
Director of the Company
William S. Sudhaus............... 1995 450,000 157,500 $240,000(4)
Former President, Chief 1994 443,695 292,311 75,000 6,000(1)
Operating Officer of the 1993 409,690 122,907 37,500 7,500(1)
Company, former Chief
Executive Officer of
Powerine and IRLP and
current Director of the
Company
John D.R. Wright, III............ 1995 279,083 65,000 308,000(2)(7)
Former President and Chief 1994 273,114 50,000
Operating Officer of IRLP 1993 260,250 50,000 87,500(2)
A. L. Gualtieri.................. 1995 289,361 74,900 140,000(4) 21,748(5)
Former President and Chief 1994 333,754 53,202 50,000 207,103(4)
Operating Officer of 1993
Powerine
David M. Hermes.................. 1995 201,983 118,500 304,000(4) 140,219(8)
Former Senior Vice 1994 181,042 262,875 50,000
President, Raw Material 1993 196,875 37,500 16,666
Supply of Indian Powerine
L.P., a wholly-owned
subsidiary of the Company
</TABLE>
-69-
<PAGE>
- ---------------------
(1) Directors' fees.
(2) Mr. Wright was granted 175,000 stock appreciation rights ("SARs") pursuant
to a Bonus Payment Rights Agreement dated October 1, 1991 among Mr. Wright,
IRLP and Indian Refining & Marketing, Inc. ("IR&M"), the general partner of
IRLP. Pursuant to an Amendment to Agreement dated as of February 25, 1993,
IR&M, IRLP and Mr. Wright agreed to reduce the number of SARs then held by
Mr. Wright from 175,000 to 87,500. In addition, the terms of the SARs held
by Mr. Wright were amended to provide that (a) until the aggregate amount
received by Mr. Wright upon exercise of SARs equals $2 million, each SAR
would be exercisable for the sum of (i) the amount (the "Basic Value") by
which the average closing price of shares of Common Stock of the Company
for the 20 trading days prior to the date of exercise exceeds the base
price of $8.00, plus (ii) the Basic Value up to $11.42 (the "Incremental
Value"); (b) thereafter and until the aggregate Basic Value of the SARs to
be exercised equals the aggregate Incremental Value received by Mr. Wright
described in (a) above, Mr. Wright would not receive any amount upon the
exercise of SARs; and (c) thereafter, each SAR would be exercisable for the
Basic Value. In January 1996, Mr. Wright surrendered his SARs as part of
his severance agreement with IRLP in consideration for a payment of
$308,000 see "Employment Agreements."
(3) Represents severance expense which, although accrued in fiscal 1995, was
not paid until fiscal 1996.
(4) Amounts paid as consideration for termination of prior employment contract.
(5) Consists of car allowance and vacation payout.
(6) Amounts paid as consideration for termination of prior employment contract.
(7) Proceeds received for surrender of SARs; recorded as expense in fiscal 1995
but paid in fiscal 1996.
(8) Proceeds received for exercise of SARs.
Option Grants in Last Fiscal Year (Year Ended September 30, 1995)
No options were granted to Named Executives during the fiscal year
ended September 30, 1995.
Option/SAR Exercises And Option/SAR Values
The following table shows the number of SAR's exercised during the year
ended September 30, 1995 by Named Executives, the value realized upon such
exercise and the total number of unexercised options and SARs held at September
30, 1995 by such officers. The table also shows the values for unexercised
"in-the-money" options and SARs which represent the positive spread between the
exercise price of such stock options or SARs and the fair market value of the
shares of Common Stock as of September 30, 1995 which was $9.50 per share.
-70-
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs in-the-Money
at Fiscal Year-End Options/SARs
(September 30, 1995) at Fiscal Year-End
Shares Value (#) ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
---- -------------- ----- --------------- --------------
<S> <C> <C> <C> <C>
Joseph L. Castle II 0 - 91,875/8,125 $236,250/-
William S. Sudhaus 0 - 85,625/26,875 -/-
John D.R. Wright, III 0 - 87,500/- -/-
A. L. Gualtieri 0 - 37,500/12,500 -/-
David M. Hermes 20,000(1) 140,219 50,000/16,667 -/-
</TABLE>
- ----------------
(1) Represents the number of shares with respect to which SARs were exercised.
Subsequent to September 30, 1995, Mr. Sudhaus surrendered all 150,000
of his SARs upon his resignation from the Company and Mr. Wright surrendered
all 87,500 of his SARs as part of his severance agreement with IRLP. See
"Employment Agreements":
Pension Plans
The Company has no defined benefit pension plans.
IRLP Retirement Plan. IRLP established a defined benefit retirement
plan (the "IRLP Retirement Plan") commencing January 1, 1991. All employees of
IRLP and IPLP, including officers, were eligible for benefits under the IRLP
Retirement Plan commencing on the first January 1 after attaining 20.5 years of
age and five years of service with IRLP or IPLP. The IRLP Retirement Plan is
administered by a trustee and is funded at amounts required by the Employee
Retirement Income Security Act of 1974, as amended.
The table below shows the estimated annual retirement benefits at age
65 to participants in the IRLP Retirement Plan.
PENSION PLAN TABLE
------------------
Average Earnings Years of Service(1)
- ---------------- -------------------
15 20 25 30 35
-- -- -- -- --
$125,000 $14,880 $19,840 $24,800 $29,760 $34,720
$150,000 and 16,755 22,340 27,925 33,510 39,095
greater
- ---------------
(1) Employees are generally entitled to annual retirement benefits equal to
1.1% of average earnings up to compensation covered by social security and
0.5% of average earnings that exceed compensation covered by social
security, up to a maximum of $150,000. Such annual benefit is multiplied by
the years of service up to a maximum of 35 years.
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Average earnings are generally computed based upon all salary and
bonuses received by each eligible employee during the five highest paid
compensation years during the last ten years before retirement.
Employees may retire at age 65 or at age 62 if they have 20 years of
vested service.
As of September 30, 1995, the Named Executives were credited under the
IRLP Retirement Plan with the years of service indicated: William S. Sudhaus,
five years; John D.R. Wright III, four years; and David M. Hermes, four years.
On December 12, 1995, IRLP sold the Indian Refinery to American Western
Refining L.P. ("American Western"), a subsidiary of Gadgil Western Corp
("Gadgil"). As part of the sale, the IRLP Retirement Plan was transferred to
American Western.
Compensation of Directors
All of the Outside Directors are paid director's fees of $25,000 per
year. In addition, all Directors received fees for attending meetings of the
Board of Directors. Until March 23, 1995, the fee per meeting was $1,500.
Thereafter, it was reduced twenty-five percent (25%) to $1,125. Committee
members also receive a fee for attending a committee meeting. Such fee was $500
per meeting until March 23, 1995 and $375 per meeting thereafter.
In addition each Outside Director is granted an option to purchase
5,000 shares of Common Stock each calendar year on the earlier to occur of (a)
the first trading day coinciding with or immediately following the fifteenth day
after the Company's regular Annual Stockholders' Meeting or (b) the first
trading day in May, for serving as a director. The Company issued to each of
Messrs. Bonovitz and Sullivan options to purchase 5,000 shares of Common Stock
at $11.75 per share for 1994 and options to purchase another 5,000 shares of
Common Stock at $9.00 per share for 1995.
In addition to the foregoing, Mr. Sullivan was paid a special fee of
$40,000 related to meetings concerning the disposition of the Company's refining
operations.
Employment Agreements
Employment Agreements among the Company and certain of its subsidiaries
and the Named Executives are described below:
Effective January 1, 1994, Joseph L. Castle II entered into an
Employment Agreement with the Company pursuant to which Mr. Castle agreed to
serve as Chairman and Chief Executive Officer of the Company through December
31, 1995. This agreement provided for Mr. Castle to receive annual compensation
at the rate of $475,000 plus cost of living increases and discretionary bonuses
to be determined by the Compensation Committee of the Board of Directors (the
"Compensation Committee"). Mr. Castle's agreement also provided that he would be
entitled to receive certain separation pay and benefits in the event that the
Company fails to renew the agreement or following a change in control of the
Company, as such event is described in the agreement. Under the agreement, a
change in control included any person becoming the beneficial owner of more than
50% of the Company's voting stock or the sale of all or substantially all of the
assets of the Company. Mr. Castle has agreed to waive any such payments which
might have resulted from the Company's disposition of its refining operations.
In addition, Mr. Castle's agreement provides certain benefits upon Mr. Castle's
retirement from the Company. Upon retirement, subject to certain conditions set
forth in the agreement, Mr. Castle will be entitled to receive, for life, 20% of
his annual base salary, as defined in the agreement, or one of three actuarially
equivalent benefits.
Effective April 1, 1995, Mr. Castle's annual salary was reduced
twenty-five percent (25%) to $356,250 with his consent. At September 30, 1995,
Mr. Castle' accrued retirement benefits aggregated $984,577. The Company has not
renewed Mr. Castle's employment agreement which expired December 31, 1995.
Effective January 1, 1994, William S. Sudhaus entered into an Amended
and Restated Employment Agreement with the Company pursuant to which Mr. Sudhaus
agreed to serve as President and Chief Operating Officer of the Company and
Chairman and Chief Executive Officer of IRLP and Powerine. This agreement
provided for Mr. Sudhaus to receive annual compensation at the rate of $450,000
plus cost of living increases and bonuses based on the profitability of the
refining subsidiaries, and discretionary bonuses to be determined by the
Compensation Committee. The agreement also provided that Mr. Sudhaus would be
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entitled to receive certain separation pay and benefits following a change in
control of the Company, as such event is defined in the agreement. Under the
agreement, a change in control included any person becoming the beneficial owner
of more than 50% of the Company's voting stock, any such person having nominated
or designated more than 50% of the Company's directors, or the sale of all or
substantially all of the assets of the Company.
Effective April 1, 1995, Mr. Sudhaus agreed to a fifteen percent (15%)
reduction in his annual salary to $382,500 but the agreement included a
provision that such salary reduction would be restored retroactively under
certain conditions, including the failure to consummate a management buyout of
the Indian Refinery.
Effective, January 3, 1996, Mr. Sudhaus resigned from all executive
officer positions he held in the Company and its refining subsidiaries and the
Company and Mr. Sudhaus entered into a severance agreement which was effective
January 1, 1996. Under the terms of the severance agreement, Mr. Sudhaus
received $240,000 from the Company and surrendered his 150,000 SARs to the
Company for additional consideration of $500,000 to be paid over nine months.
The Company has paid Mr. Sudhaus $351,112 through February 29, 1996. The
remaining $388,888 is payable in equal monthly installments through September
30, 1996 but prepayment of the remaining balance is required upon the sale of
substantially all of the Company's remaining assets or if certain financing is
received by the Company.
Mr. Sudhaus remains a director of the Company.
On October 1, 1991, John D.R. Wright, III entered into an Employment
Agreement with IR&M and IRLP, as amended on February 25, 1993, pursuant to which
Mr. Wright agreed to serve as President and Chief Operating Officer of IR&M
through January 31, 1996. This agreement provided for Mr. Wright to receive
annual compensation at the rate of $250,000 plus cost of living increases and
bonuses based on achievement of certain targeted levels of performance by the
Indian Refinery and based on the profitability of IRLP. Mr. Wright's agreement
also provided that he would be entitled to receive certain separation pay and
benefits following a change in control of IRLP, as such event is described in
the agreement. Under the agreement, a change in control occurs if neither the
Company nor MG owns at least 50% of the equity interests in IRLP or if IRLP no
longer owns at least 50.01% of the Indian Refinery. In connection with Mr.
Wright's agreement, Mr. Wright was also a party to a Bonus Payment Rights
Agreement, dated October 1, 1991, as amended on February 25, 1993, with IR&M and
IRLP pursuant to which Mr. Wright received 87,500 SARs from IR&M.
Effective April 1, 1995, Mr. Wright agreed to a fifteen percent (15%)
salary reduction but the related agreement included a provision that such
reduction would be restored under certain conditions, including the failure to
consummate a management buyout of the Indian Refinery. Subsequent to September
30, 1995, Mr. Wright's salary reduction was restored retroactive to April 1,
1995.
On December 22, 1995, Mr. Wright resigned from all positions he held in
IR&M and IRLP. In January 1996, the Company and Mr. Wright entered into a
severance agreement whereby Mr. Wright was paid $308,000 and Mr. Wright agreed
to surrender the 87,500 SARs he owned. The $308,000 consisted of $58,000 cash
and the discharge of a $250,000 note owed to IR&M by Mr. Wright.
On April 1, 1994, A. L. Gualtieri entered into an Employment Agreement
with Powerine, a wholly-owned refining subsidiary, pursuant to which Mr.
Gualtieri agreed to serve as President and Chief Operating Officer of Powerine
through December 31, 1995. This agreement provided for Mr. Gualtieri to receive
annual compensation at the rate of $280,000 plus cost of living increases and
discretionary bonuses based on achievement of certain targeted levels of
performance of Powerine as determined by the Compensation Committee. Mr.
Gualtieri's agreement also provided that he would be entitled to receive certain
separation pay and benefits following a change in control of Powerine, as such
event is described in the agreement. Under the agreement, a change in control
includes any person becoming the beneficial owner of more than 50% of the
Company's or Powerine's voting stock or the sale of all or substantially all of
the assets of Powerine. Mr. Gualtieri was elected Chairman and Chief Executive
Officer of Powerine, in addition to President, in February 1995.
In November 1995, Mr. Gualtieri informed Powerine that he would resign
as of December 31, 1995. Powerine and Mr. Gualtieri were unable to agree upon
the amount of compensation to which Mr. Gualtieri was entitled under his
employment agreement as a result of his resignation. In December 1995, Powerine
paid Mr. Gualtieri $140,000 as severance compensation. Effective January 16,
1996 Powerine sold its remaining assets pursuant to a merger with a subsidiary
of Energy Merchant Corp. ("EMC") and EMC became responsible for Mr. Gualtieri's
unsatisfied severance compensation claims.
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On February 14, 1992, David M. Hermes entered into an Employment
Agreement with IR&M, Powerine and IP Oil Company ("IPCO"), another wholly-owned
refining subsidiary of the Company, as amended on March 1, 1993, March 2, 1994
and May 9, 1994, pursuant to which Mr. Hermes agreed to serve as Senior Vice
President, Raw Material Supply of IR&M, Powerine and IPCO through February 28,
1997. The agreement, which was guaranteed by the Company, provided for Mr.
Hermes to receive annual compensation at the rate of $200,000 plus cost of
living increases and discretionary bonuses based on achievement of certain
targeted levels of performance by IR&M. In addition, Mr. Hermes was advanced
$75,000 in 1992, which amount was either to be applied against Mr. Hermes'
future compensation or to be repaid if Mr. Hermes' employment was terminated
under certain circumstances prior to February 29, 1996. In connection with Mr.
Hermes's agreement, Mr. Hermes also entered into a Bonus Payment Rights
Agreement, dated February 12, 1992, pursuant to which Mr. Hermes received 20,000
SARs which were exercised on November 4, 1994, for which Mr. Hermes received
$140,219.
In January 1996, the Company and Mr. Hermes entered into a severance
agreement, which was effective December 31, 1995. Under the terms of the
severance agreement, Mr. Hermes resigned from all of his positions with IR&M,
Powerine and IPCO. In return, the Company agreed to pay Mr. Hermes $304,000 and
discharged a $75,000 advance from the Company to Mr. Hermes. Of this amount.
$152,500 had been paid by February 28, 1996. The remaining $151,500 is payable
in equal monthly installments through August 31, 1996.
As of February 28, 1996, neither the Chief Executive Officer nor any of
the Named Executive officers had an employment contract with the Company,
although Mr. Castle is entitled to benefits from his employment contract which
terminated December 31, 1995. All of the Named Executive officers, other than
Mr. Castle, have terminated their positions with the Company and its
subsidiaries except Mr. Sudhaus who continues as a director of the Company.
Retention Bonus Program
On March 17, 1994, the Compensation Committee approved a retention
bonus program (the "Retention Bonus Program") pursuant to which the Compensation
Committee could, in its sole discretion, award a retention bonus to any covered
executive in any calendar quarter during which the Retention Bonus Program is in
effect. The covered executives included each of the Named Executives. Each
retention bonus award could include one or both of: (a) an acceleration of the
payment of a designated percentage of the covered executive's then current
annual performance bonus, not to exceed 100% of such performance bonus prorated
on a quarterly basis; and (b) the payment of an additional bonus which for any
quarter may not aggregate more than 7.5% of such executive's base salary. The
Retention Bonus Program also contemplated that a retention bonus pool be
established for employees other than the covered executives. The Compensation
Committee could have made retention bonus awards from this bonus pool in its
sole discretion. The Board of Directors terminated the Retention Bonus Program
effective December 31, 1994.
During the fiscal year ended September 30, 1995, Mr. Castle earned and
received $59,375, Mr. Sudhaus earned and received $157,500 and Mr. Gualtieri
earned and received $74,900 under the Retention Bonus Program. Mr. Hermes earned
and received a discretionary bonus of $118,500.
Compensation Committee Interlocks and Insider Participation
During fiscal 1995, the Compensation Committee consisted of Sheldon M.
Bonovitz, Chairman, John W. Sullivan and, until his cessation of service as a
director on June 5, 1995, Warren V. Musser.
During fiscal 1995, the Company engaged the law firm of Duane, Morris &
Heckscher, of which Mr. Bonovitz is Vice Chairman and a partner, to provide
legal services for the Company. In May 1995, Duane, Morris & Heckscher became
general counsel of the Company.
On December 11, 1991, John W. Sullivan and a financial institution
entered into a Loan Agreement with the Company pursuant to which Mr. Sullivan
loaned the Company $250,000 (the "Sullivan Loan"). The Sullivan Loan matures on
June 30, 1996 and earns interest at the annual rate of LIBOR plus one-half of
one percent established in advance on November 21 of each year while the
Sullivan Loan is outstanding. Interest is payable annually on December 31 of
each year and at maturity of the Sullivan Loan. The Company may elect to pay
interest in either cash or Common Stock. Should the Company elect to pay
interest in Common Stock, Mr. Sullivan may elect to capitalize the interest in
lieu of accepting the Common Stock. The Company paid $8,139 to Mr. Sullivan as
interest during the year ended September 30, 1995. The Company repaid $125,000
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for the Sullivan Loan subsequent to September 30, 1995. The remaining principal
balance is payable in two installments of $62,500 each on March 31, 1996 and
June 30, 1996.
Mr. Bonovitz resigned as a Director on October 6, 1995. Mr. Sullivan
resigned as a director on January 5, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth, as of March 15, 1996, 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:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership(1) Class(1)
- ------------------------------------ ----------------------- --------
<S> <C> <C>
FMR Corp. 988,750(2) 14.77%
82 Devonshire Street
Boston, Massachusetts 02109
Joseph L. Castle II and Sally W. Castle 539,883(3) 7.96%
One Radnor Corporate Center, Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
First Pacific Advisors Inc. 525,000(5) 7.84%
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
Brandywine Asset Management, Inc. 466,500(6) 6.97%
3 Christina Center, 201 N. Walnut Street
Wilmington, Delaware 19801
Corbyn Investment Management, Inc. 409,525(4) 6.12%
Suite 108
2330 W. Joppa Road
Lutherville, Maryland 21093
</TABLE>
- ----------
(1) Based on a total of 6,693,646 shares of Common Stock issued and outstanding
as of March 15, 1996. In calculating each respective holder's percentage
ownership and beneficial ownership in the table above, shares of Common
Stock which the holder has the right to acquire within 60 days are
included.
(2) These shares are beneficially owned by Fidelity Management & Research
Company as a result of its serving as investment adviser to various
investment companies registered under Section 8 of the Investment Company
Act of 1940 and as investment adviser to certain other funds which are
generally offered to limited groups of investors. Based on information
furnished by stockholder as of February 14, 1996, the most recent date as
of which such information was so furnished.
(3) Joseph L. Castle II and Sally W. Castle are husband and wife. As such, each
is deemed to beneficially own 539,883 shares of Common Stock. Includes (a)
410,733 shares of Common Stock owned by Mr. Castle and 37,275 shares of
Common Stock owned by Mrs. Castle; (b) 67,500 shares of Common Stock
issuable upon exercise of options which are exercisable within 60 days by
Mr. Castle at $6.00 per share; (c) 24,375 shares of Common Stock issuable
upon exercise of options which are exercisable within 60 days by Mr. Castle
at $12.25 per share.
(4) These shares are beneficially owned by a group consisting of Corbyn
Investment Management, Inc., an investment adviser registered under the
Investment Advisers Act of 1940 and Greenspring Fund, Inc., an investment
company registered under the Investment Company Act of 1940 and for which
Corbyn Investment Management, Inc. serves as investment adviser. Based upon
information furnished by stockholder as of January 25, 1996.
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(5) Based on information furnished by stockholder as of February 13, 1996, the
most recent date as of which such information was so furnished.
(6) Based on information furnished by stockholder as of February 22, 1996, the
most recent date as of which such information was so furnished.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 15, 1996, the shares of
Common Stock beneficially owned by each of the Company's Chief Executive Officer
and the Company's four other most highly compensated executive officers during
fiscal 1995 (the "Named Executives"), by each Director and nominee for Director
of the Company and by the Directors, nominee and executive officers of the
Company as a group, with sole voting and investment power unless otherwise
indicated:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership (1) Class (1)(2)
- ------------------------ ------------------------ -------------
<S> <C> <C>
Joseph L. Castle II............................................ 539,883(3) 7.96%
William S. Sudhaus (9)......................................... 85,625(4) 1.26%
David M. Hermes (9)............................................ 50,000(5)
John D.R. Wright, III (9)...................................... 0
A.L. Gualtieri (9)............................................. 37,500(6)
Martin R. Hoffmann............................................. 2,000(7)
Sidney F. Wentz................................................ 0
All Directors, Nominees and Executive Officers
as a group (12 persons)........................................ 757,783(8) 10.82%
</TABLE>
- -------------
(1) Based on a total of 6,693,646 shares of Common Stock issued and outstanding
as of March 15, 1996. In calculating each respective holder's percentage
ownership and beneficial ownership in the table above, shares of Common
Stock which the holder has the right to acquire within 60 days are
included.
(2) Percentages of less than one percent are omitted.
(3) Joseph L. Castle II and Sally W. Castle are husband and wife. As such, each
is deemed to beneficially own 539,883 shares of Common Stock. Includes (a)
410,733 shares of Common Stock owned by Mr. Castle and 37,275 shares of
Common Stock owned by Mrs. Castle; (b) 67,500 shares of Common Stock
issuable upon exercise of options which are exercisable within 60 days by
Mr. Castle at $6.00 per share; and (c) 24,375 shares of Common Stock
issuable upon exercise of options which are exercisable within 60 days by
Mr. Castle at $12.25 per share.
(4) Represents (a) 61,250 shares of Common Stock issuable upon exercise of
options which are exercisable within 60 days by Mr. Sudhaus at $11.00 per
share and (b) 24,375 shares of Common Stock issuable upon exercise of
options which are exercisable within 60 days by Mr. Sudhaus at $12.25 per
share.
(5) Represents (a) 12,500 shares of Common Stock issuable upon exercise of
options which are exercisable within 60 days by Mr. Hermes at $12.25 per
share and (b) 37,500 shares of Common Stock issuable upon exercise of
options which are exercisable within 60 days by Mr. Hermes at $11.00 per
share.
(6) Represents shares of Common Stock issuable upon exercise of options which
are exercisable within 60 days by Mr. Gualtieri at $11.00 per share.
(7) These shares are held by an Individual Retirement Account for the benefit
of Mr. Hoffmann.
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(8) Includes 307,500 shares of Common Stock issuable upon exercise of options
which are exercisable within 60 days, including 173,125 options exercisable
by Messrs. Sudhaus, Hermes and Gualtieri (see below).
(9) At March 15, 1996, Messrs. Sudhaus, Hermes, Wright and Gualtieri were no
longer executive officers of the Company or any of its significant
subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Stockholder Loan
See "Compensation Committee Interlocks and Insider Participations."
Legal Fees
Mr. Craig Culbertson, a former officer of the Company and several of
its subsidiaries, is also a partner in a law firm. The law firm served as
general counsel to the Company until June 1995 and has remained as special
counsel thereafter. Subsequent to September 30, 1995, Mr. Culbertson resigned
from all positions he held in the Company and its subsidiaries. During the year
ended September 30, 1995, the Company and its subsidiaries incurred legal fees
of $2,593,000 to the law firm.
Loan to Officer
On February 26, 1993, John D.R. Wright, III, an officer of a
subsidiary, was loaned $250,000. The principal amount of the loan was due and
payable in full on the earlier of January 31, 1996 or the termination of the
officer's employment. The loan accrued interest at the prime rate in effect on
the date of the loan as adjusted each January 1. Mr. Wright terminated his
employment on December 22, 1995. The loan and accrued interest was offset
against amounts due to Mr. Wright for his surrender of his stock appreciation
rights (see "Executive Compensation").
Management Fees
On March 31, 1993, the Company entered into an agreement to sell to
Terrapin its oil and gas partnership management businesses for $1,100,000
($800,000 note bearing interest at 8% per annum and $300,000 cash) which
approximated the book value of its partnership interests. The closing of the
stock purchase transaction occurred on June 30, 1993. Terrapin is wholly-owned
by Richard Staedtler. Mr. Staedtler was an executive officer of the Company from
September 1983 until June 1993. In November 1994, he rejoined the Company as
its Chief Financial Officer.
In conjunction with the sale of its partnership management business,
the Company and one of its subsidiaries entered into two management agreements
with Terrapin to manage its exploration and production operations. Management
fees incurred to Terrapin for the year ended September 30, 1995 aggregated
$584,000.
Payment of Legal Fees for Former Director
In conjunction with its settlement with MG in October 1994, the Company
paid certain legal fees incurred by Mr. W. Arthur Benson, who was a director of
the Company until June 6, 1995. During the year ended September 30, 1995, the
Company paid $327,000 of legal fees on behalf of Mr. Benson.
CORE
In October 1994, the Company decided to dispose of its refining
operations. During the period from October 14, 1994 until September 29, 1995,
the Company financed three efforts to sell both or one of its two refineries to
CORE (previously SIPAC, Inc.). CORE is wholly-owned by Mr. William Sudhaus.
Until his resignation in January 1996, Mr. Sudhaus was an executive officer of
the Company and the Chairman of the Board and Chief Executive Officer of several
refining subsidiaries of the Company. He remains a director of the Company.
Under the terms of agreements with CORE, the Company was obligated to reimburse
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CORE for certain expenses paid by CORE in its attempts to obtain financing for a
management buyout of one or both of the Company's refineries. Such agreements
also provided that the Company would be repaid for most of such funding should
CORE be successful. In September 1995, the final CORE attempt to obtain
financing failed. During the year ended September 30, 1995, the Company and its
subsidiaries incurred $3,768,000 of reimbursement obligations related to CORE.
EXERCISE/DISCHARGE OF SARs
In November 1992, the Company granted William Sudhaus, an executive
officer, 112,500 SARs in exchange for his partnership interests in IRLP. The
exercise price was $6.00. In June 1993, the Company granted Mr. Sudhaus an
additional 150,000 SARs in exchange for the remaining partnership interests in
IRLP owned by Mr. Sudhaus. The exercise price was $12.50. In November 1994, Mr.
Sudhaus received $1,026,035 upon exercising the first 112,500 SARs. In January
1996, Mr. Sudhaus exchanged the remaining 150,000 SARs for $500,000.
CERTAIN BUSINESS RELATIONSHIPS
MG AND ITS AFFILIATES
Immediately prior to the MG Settlement described in greater detail
below, in excess of 40% of the Company's outstanding common stock was owned by
Metallgesellschaft Corp. ("MG"), a wholly-owned subsidiary of Metallgesellschaft
AG ("MG AG"), a German conglomerate. From August 1989 until the MG Settlement,
the Company and its subsidiaries entered into many agreements with MG and its
affiliates, including agreements pursuant to which MG and its affiliates
financed the Company's refining and natural gas marketing operations, purchased
all of the Company's refined product output, and supplied natural gas to the
Company for resale under a long-term contract to a third party. In December
1993, the Company was informed that MG and MG AG had incurred substantial cash
expenditures and losses related in part to margin payments required by the New
York Mercantile Exchange and various over-the-counter derivatives trading
counterparties as a result of a decline in oil prices. Thereafter, in its annual
report issued in February 1994, MG AG announced that its consolidated net loss
for fiscal 1993 was DM 2.025 billion ($1.241 billion).
As a result of the financial difficulties surrounding MG and its
affiliates, the Company became concerned that MG and its affiliates would be
unable to perform their obligations under their agreements with the Company or
might seek to avoid performance through litigation challenging the validity of
some or all of such agreements. Although the Company believed it would be
successful in any litigation seeking to enforce the agreements, the Company also
believed that the risks and substantial costs of such litigation, including the
risk of being unable to collect any damages which might be awarded, as well as
the disruption to the Company's business, made litigation undesirable. In
addition, the Company believed that MG might enter bankruptcy and seek to reject
some or all of such agreements, in which case the Company would be likely to
recover little if any damages. In addition, relationships between the Company
and MG, as a major stockholder of the Company, had become adversarial, which the
Company believed was not in the best interests of the Company or its other
stockholders. Accordingly, in July 1994 the Company and MG commenced
negotiations to attempt to restructure the contractual and other relationships
between MG and its affiliates and the Company and its affiliates.
On August 31, 1994, the Company entered into two agreements with MG and
certain of its affiliates pursuant to which the parties thereto agreed to amend
or terminate a number of contractual relationships among them (the "MG
Settlement"). In the first step of the MG Settlement, which closed on September
9, 1994, MG transferred 3.6 million shares of Common Stock to the Company in
exchange for approximately $39.8 million of participations the Company held in
debt obligations of the Company and its affiliates to MG Trade Finance Corp.
("MGTFC"), a wholly-owned subsidiary of MG.
In the second step of the MG Settlement, which closed on October 14,
1994, MG (a) cancelled certain debt obligations owed to MGTFC by the Company and
its affiliates, and assumed IRLP's obligations under its $120 million senior
facility with Societe Generale (the "Senior Facility"), together totaling
approximately $322 million, (b) transferred back to the Company the remaining
969,000 shares of Common Stock held by MG and a $5.5 million debenture
convertible into 500,000 shares of Common Stock, (c) issued to the Company a $10
million note payable in three years (the "MG Note"), (d) terminated all of its
interests in the Company's natural gas operations and (e) agreed to supply all
crude oil necessary for the Company to meet its delivery obligations under a
forward sale contract with a third party entered into in September 1993. In
exchange for the foregoing, IRLP and Powerine (i) amended their offtake
agreements (the "Indian Offtake Agreement" and the "Powerine Offtake Agreement,"
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respectively and collectively the "Offtake Agreements") to terminate effective
February 1, 1995 although sales under the Powerine Offtake Agreement were to
continue subsequently, (ii) amended their working capital facilities to
terminate on March 31, 1995, and (iii) transferred to MG certain of the
Company's participations in debt obligations of the Company and its affiliates
to MGTFC. In connection with the MG Settlement, IRLP and MGNG also entered into
a four-year natural gas swap agreement.
As a result of the MG Settlement, MG's ownership of the Company's
common stock was reduced to zero and most of the related party transactions
between MG and its affiliates and the Company and its affiliates were terminated
or restructured except as outlined below. Furthermore, as of October 14, 1994,
the consummation of the MG Settlement, MG and its affiliates ceased to be a
related party.
On April 14, 1995, Powerine repaid all of the indebtedness owed by it
to MGTFC, including $10,828,000 of disputed amounts (the "Disputed Amount"). On
the same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10,000,000.
c. Powerine transferred its claim with respect to the Disputed Amount to
the Company.
d. The claim with respect to the Disputed Amount was submitted to
binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10,000,000 loan to the Company against the
$10,000,000 MG note it issued to the Company as part of the MG
Settlement, to the extent the arbitrator decides the claim with
respect to the Disputed Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled, MG will still owe
the Company its $10 million note (due October 14, 1997) and MG will also owe the
Company $828,000. If the arbitrator settles the Disputed Amount entirely in MG's
favor, the Company's note from MG will be discharged. In such case the Company's
future earnings will also be adversely impacted since the Company has not
recorded any reserve against the note.
On September 8, 1995, the Company filed its Statement of Claim and
Memorandum. On December 6, 1995, MG filed its Notice of Defense and Response to
Claimant's Statement of Claim and Memorandum. The Company filed a reply on
February 14, 1996, and the parties are proceeding with discovery as to the
amount of damages.
In January 1996, MG did not pay interest on the $10,000,000 note when
such interest was due. As a result, the entire note is due to be paid to the
escrow account for the Powerine Arbitration. The Company has demanded that MG
pay the entire note.
DUANE, MORRIS & HECKSCHER
During the period from October 1, 1994 to October 4, 1995, Mr. Sheldon
Bonovitz served as a director of the Company. Mr. Bonovitz is also a member of
the law firm of Duane, Morris & Heckscher. During the fiscal year ended
September 30, 1995, the Company engaged Duane, Morris & Heckscher to perform
legal services. In May 1995, Duane, Morris & Heckscher became the Company's
general counsel.
-79-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. 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 to this Form 10-K.
3. 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.
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
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)
10.1 Credit Agreement between Castle Energy Corporation and MG Trade Finance Corp., dated
October 24, 1990(1)
10.2 Sixth Amendment to Credit Agreement, effective as of May 27, 1993, between MG Trade Finance
Corp. and Castle Energy Corporation(2)
10.3 Seventh Amendment to Credit Agreement, dated August 25, 1993, between MG Trade Finance Corp.
and Castle Energy Corporation(8)
10.4 Amended and Restated Revolving Loan and Security Agreement, dated May 27, 1993, among Indian
Refining Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8)
10.5 Purchase and Sale Agreement, dated September 3, 1992, by and among Castle Energy Corporation,
Atlantic Richfield Company, Tabasco Gas Pipe Line Company and B&A Marketing Company(6)
10.6 Loan Agreement, dated December 11, 1991, among Castle Energy Corporation, Union d'Etudes et
d'Investissements and John W. Sullivan with MG Trade Finance Corp. joining for the limited purpose
stated therein(3)
10.7 Intercreditor Agreement, dated December 11, 1991, among MG Trade Finance Corp., Union d'Etudes
et d'Investissements and John W. Sullivan(3)
10.8 Amended and Restated Offtake Agreement, dated May 12, 1993, between Indian Refining Limited
Partnership and MG Refining and Marketing, Inc.(8)
10.9 Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992, between
Metallgesellschaft Corp. and Indian Refining Limited Partnership(4)
10.10 Amendment 1 to Agreement for the Purchase and Sale of Feedstocks, dated February 1, 1992,
between Metallgesellschaft Corp. and Indian Refining Limited Partnership(5)
10.11 Amendment No. 2 to Agreement for the Purchase and Sale of Feedstocks, dated June 29, 1993,
between Metallgesellschaft Corp. and Indian Refining Limited Partnership(8)
10.12** Long Term Supply Agreement, dated November 1, 1992, among Shell Canada Limited, Salmon
Resources Ltd. and Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and MG
Refining and Marketing, Inc.(7)
10.13 First Amendment to Long Term Supply Agreement, dated as of January 12, 1993, among Indian
Refining Limited Partnership, Indian Refining & Marketing Inc., MG Refining and Marketing, Inc.,
Salmon Resources Ltd. and Shell Canada Limited(8)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.14 Second Amendment to Long Term Supply Agreement, dated June 28, 1993, among Shell Canada
Limited, Salmon Resources Ltd. and Indian Refining Limited Partnership, Indian Refining &
Marketing Inc. and MG Refining and Marketing, Inc.(8)
10.15 Replacement Gas Purchase Contract, effective February 1, 1992, between ARCO Oil and Gas
Company and Lone Star Gas Company(8)
10.16 Loan Agreement, dated September 30, 1993, among Castle Texas Production Limited Partnership,
Castle Production Company, Castle Energy Corporation and MG Trade Finance Corp., and
Appendix A thereto(9)
10.17 Swap Agreement, dated May 27, 1993, between Indian Refining Limited Partnership and MG
Refining and Marketing, Inc.(8)
10.18 Amendment to Swap Agreement, dated July 29, 1993, between Indian Refining Limited Partnership
and MG Refining and Marketing, Inc.(8)
10.19 Amended and Restated Pipeline Management Agreement, effective as of December 1, 1992, between
Castle Texas Pipeline Limited Partnership and MG Gathering Corp.(8)
10.20 Amended and Restated Service Agreement, effective as of December 1, 1992, between CEC Gas
Marketing Limited Partnership and MG Natural Gas Corp.(8)
10.21 Consent and Agreement, dated May 27, 1993, between Shell Canada Limited and Salmon Resources
Ltd. and Societe Generale, Southwest Agency(8)
10.22 Consent, dated May 27, 1993, between Texaco Pipeline, Inc. and Societe Generale, Southwest
Agency(8)
10.23 Registration Rights Agreement, dated as of December 11,
1991, among Castle Energy Corporation, MG Trade Finance
Corp., Union d'Etudes et d'Investissements and John W.
Sullivan(3)
10.24 Bonus Payment Rights Agreement, dated November 20, 1992, among Indian Refining Limited
Partnership, Indian Refining & Marketing Inc. and William S. Sudhaus(8)
10.25 Bonus Payment Rights Agreement, dated June 21, 1993, among Indian Refining Limited Partnership,
Indian Refining & Marketing Inc. and William S. Sudhaus(8)
10.26 Amended and Restated Employment Agreement, dated December 21, 1992, among Indian Refining
Limited Partnership, Indian Refining & Marketing Inc., Castle Energy Corporation, William S.
Sudhaus and Danik Corporation(8)
10.27 Employment Agreement, dated October 1, 1991, among John D.R. Wright, III, Indian Refining
Management Company and Indian Refining Limited Partnership(3)
10.28 Amendment to Agreement, dated February 25, 1993, between Indian Refining & Marketing Inc.,
Indian Refining Limited Partnership and John D.R. Wright, III(8)
10.29 Bonus Payment Rights Agreement, dated October 1, 1991, among Indian Refining Management
Company, Indian Refining Limited Partnership and John D.R. Wright, III(3)
10.30 Letter Agreement, dated February 25, 1993, between John D.R. Wright, III and Indian Refining &
Marketing Inc.(8)
10.31 Management Agreement, dated July 1, 1993, between Castle Energy Corporation and Terrapin
Resources, Inc.(8)
10.32 Consent Order, dated May 14, 1992, between Indian Refining Company and the Illinois
Environmental Protection Agency(5)
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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.35 Loan Agreement, dated August 6, 1993, among Castle Texas Pipeline Limited Partnership, CEC Gas
Marketing Limited Partnership, Castle Pipeline Company, CEC Marketing Company, Castle Energy
Corporation and General Electric Capital Corporation, and exhibits thereto(8)
10.36 Letter Guarantee, dated August 31, 1993, between Metallgesellschaft AG, CEC Gas Marketing
Limited Partnership and General Electric Capital Corporation(8)
10.37 Amended and Restated Gas Purchase Contract, dated as of August 1, 1993, between MG Natural Gas
Corp. and CEC Gas Marketing Limited Partnership(8)
10.38 Offtake Agreement, dated as of October 1, 1993, by and between MG Refining and Marketing, Inc.
and Powerine Oil Company(8)
10.39 Amended and Restated Agreement for the Purchase and Sale of Feedstocks, dated as of October 1,
1993, by and between Metallgesellschaft Corp., Indian Refining Limited Partnership, Powerine Oil
Company and Indian Powerine L.P.(8)
10.40 Agreement for the Purchase and Sale of Feedstocks, dated as of September 15, 1993, among Indian
Powerine L.P., Indian Refining Limited Partnership and Powerine Oil Company(8)
10.41 First Amendment to Loan Agreement, dated as of September 17, 1993, among Indian Refining
Limited Partnership, Indian Refining & Marketing Inc. and MG Trade Finance Corp.(8)
10.42 Second Amended and Restated Offtake Agreement, dated as of October 1, 1993, between MG
Refining and Marketing, Inc. and Indian Refining Limited Partnership(8)
10.43 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited
Partnership in favor of MG Refining and Marketing, Inc.(8)
10.44 First Allonge to Subordinated Note, dated as of October 1, 1993, by Indian Refining Limited
Partnership in favor of MG Trade Finance Corp.(8)
10.45 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
10.46 Purchase Money Security Agreement, dated as of October 1, 1993, between Indian Powerine L.P. and
MG Trade Finance Corp.(8)
10.47 Global Consent, dated as of October 1, 1993, among Societe Generale, Southwest Agency, MG Trade
Finance Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc. and Indian Refining
Limited Partnership(8)
10.48 Amended and Restated Loan Agreement, dated as of October 1, 1993, between Powerine Oil
Company and MG Trade Finance Corp.(8)
10.49 Second Amendment to Deed of Trust with Assignment of Rents, Leases and Profits, Security
Agreement and Fixture Filing, dated October 1, 1993, by Powerine Oil Company in favor of MG
Trade Finance Corp.(8)
10.50 Amended and Restated Assignment of Agreements, Permits,
Licenses, Warranties and Authorizations, dated as of
October 1, 1993, between Powerine Oil Company and MG
Trade Finance Corp.(8)
10.51 Amended and Restated Secured Promissory Note (Revolving Note), dated as of October 1, 1993, by
Powerine Oil Company in favor of MG Trade Finance Corp.(8)
10.52 Second Amended and Restated Secured Promissory Note (Term Note), dated as of October 1, 1993,
by Powerine Oil Company in favor of MG Trade Finance Corp.(8)
10.53 Amended and Restated Pledge and Security Agreement, dated as of October 1, 1993, by Powerine
Oil Company in favor of MG Trade Finance Corp.(8)
10.54 Amended and Restated Three Party Security Agreement and Collateral Assignment of Hedging
Account, dated as of October 1, 1993, among Powerine Oil Company, MG Futures, Inc. and MG
Trade Finance Corp.(8)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.55 Guaranty, dated as of October 1, 1993, by Castle Energy Corporation for the benefit of MG Trade
Finance Corp.(8)
10.56 Three Party Security Agreement and Collateral Assignment of Hedging Account, dated October 1,
1993, among Indian Powerine L.P., MG Futures, Inc. and Powerine Oil Company(8)
10.57 Subordinated Offtake Note, dated as of October 1, 1993, by Powerine Oil Company in favor of MG
Refining and Marketing, Inc.(8)
10.58 Security Agreement, dated as of October 1, 1993, by Powerine Oil Company in favor of MG Refining
and Marketing, Inc.(8)
10.59 Deed of Trust with Assignment of Rents, Leases and Profits, Security Agreement and Fixture Filing,
dated as of October 1, 1993, by Powerine Oil Company for the benefit of MG Refining and
Marketing, Inc.(8)
10.60 Letter agreement (re Natural Gas Swap), dated September 30, 1993, between Metallgesellschaft Corp.
and Castle Texas Production Limited Partnership(8)
10.61 Letter agreement (re Gas Purchase Contract), dated September 30, 1993, between Castle Texas
Production Limited Partnership and MG Natural Gas Corp.(8)
10.62 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and
Percolin Limited(8)
10.63 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and Percolin Limited(8)
10.64 Side Letter Agreement, dated September 28, 1993, between Indian Powerine L.P. and Percolin
Limited(8)
10.65 Crude Oil Forward Sale Contract, dated September 28, 1993, between Indian Powerine L.P. and MG
Refining and Marketing, Inc.(8)
10.66 Confirmation of Crude Oil Forward Sale, dated September 29, 1993, between Indian Powerine L.P.
and MG Refining and Marketing, Inc.(8)
10.67 Pledge and Security Agreement, dated October 1, 1993, by Indian Powerine L.P. in favor of
Powerine Oil Company(8)
10.68 Employment Agreement, dated as of January 1, 1994, by and between Castle Energy Corporation and
Joseph L. Castle II(11)
10.69 Employment Agreement, dated as of January 1, 1994, by and among Castle Energy Corporation,
Indian Refining & Marketing Inc., Powerine Oil Company, Indian Refining Limited Partnership and
William S. Sudhaus(11)
10.70 Letter Agreement, dated February 12, 1992, by and between Indian Refining and Marketing Inc. and
David Hermes(15)
10.71 Bonus Payments Rights Agreement, dated February 12, 1992, by and among Indian Refining and
Marketing Inc., Indian Refining Limited Partnership and David Hermes(15)
10.72 Letter Agreement, dated March 1, 1993, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.73 Letter Agreement, dated March 2, 1994, between Indian Refining and Marketing Inc. and David
Hermes(15)
10.74 Letter Agreement, dated May 9, 1994, among Powerine Oil Company, Indian Refining & Marketing
Inc., IP Oil Co., Inc., Castle Energy Corporation and David Hermes(15)
10.75 Employment Agreement, dated April 1, 1994, by and between Powerine Oil Company and Albert L.
Gualtieri, Jr.(15)
</TABLE>
-83-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.76 Stock Purchase Agreement, dated August 31, 1994, among MG Trade Finance Corp.,
Metallgesellschaft Corp., Indian Powerine L.P. and Castle Energy Corporation (12)
10.77 Settlement Agreement, dated August 31, 1994, among Metallgesellschaft AG, Metallgesellschaft
Capital Corp., Metallgesellschaft Corp., MG Refining and Marketing, Inc., MG Trade Finance Corp.,
MG Natural Gas Corp., MG Gathering Corp., and MG Futures Inc. and Castle Energy Corporation,
Indian Refining Limited Partnership, IP Oil Co., Inc., Powerine Oil Company, Indian Powerine L.P.,
Indian Refining & Marketing Inc., Castle Texas Production Limited Partnership, Castle Texas
Pipeline Limited Partnership, CEC Gas Marketing Limited Partnership, Castle Production Co., Castle
Pipeline Company, CEC Marketing Company and CEC, Inc.(12)
10.78 Amendment to the Amended and Restated Offtake Agreement, dated October 14, 1994, between MG
Refining and Marketing, Inc. and Indian Refining Limited Partnership(15)
10.79 Amendment to the Offtake Agreement, dated October 14, 1994, between MG Trade Finance Corp.
and Powerine Oil Company(15)
10.80 First Amendment to the Amended and Restated Loan Agreement, dated October 14, 1994, between
Powerine Oil Company and MG Trade Finance Corp.(15)
10.81 Third Amendment to the Amended and Restated Revolving Loan and Security Agreement, dated
October 14, 1994, among Indian Refining Limited Partnership, Indian Refining & Marketing Inc. and
MG Trade Finance Corp.(15)
10.82 Crude Oil Forward Sale Contract, dated October 14, 1994, between Percolin Limited and MG
Refining and Marketing, Inc.(13)
10.83 Crude Oil Sale Contract, dated October 14, 1994, between Indian Powerine L.P. and MG Refining
and Marketing, Inc.(13)
10.84 Natural Gas Swap Agreement, dated October 14, 1994, between MG Natural Gas Corp. and Indian
Refining Limited Partnership(13)
10.85 Participation Cancellation Agreement, dated October 14, 1994, among Indian Powerine L.P., MG
Refining and Marketing, Inc., MG Trade Finance Corp. and Metallgesellschaft Corp.(13)
10.86 Pledge Agreement (Partnership Interests), dated October 14, 1994, between Castle Energy
Corporation and MG Trade Finance Corp.(13)
10.87 Pledge Agreement (Capital Stock), dated October 14, 1994, among Castle Energy Corporation,
Powerine Holding Company and MG Trade Finance Corp.(13)
10.88 Stock Option Agreement, dated October 14, 1994, among Castle Energy Corporation, Powerine
Holding Company and Powerine Oil Company(13)
10.89 Assignment Agreement, dated October 14, 1994, among Powerine Holding Company, Powerine Oil
Company, Castle Energy Corporation and Wilmington Trust Company(13)
10.90 Stock Option Agreement, dated October 14, 1994, between Castle Energy Corporation and Indian
Refining & Marketing Inc.(13)
10.91 Assignment Agreement, dated October 14, 1994, among Castle Energy Corporation, Indian Refining
& Marketing Inc. and Wilmington Trust Company(13)
10.92 Stock and Asset Purchase Agreement among SIPAC Inc. and Castle Energy Corporation, Indian
Refining & Marketing Inc., Indian Refining Limited Partnership, IP Oil Co., and Indian Powerine
L.P., dated December 6, 1994(14)
10.93 Petroleum Coke Purchase and Sales Agreement between Powerine Oil Company and MGPC Petcoke,
Inc., dated as of January 1, 1994(15)
10.94 August 30, 1994 Letter Agreement between Castle Energy Corporation and ARCO regarding the
Purchase of the Oak Hill Production Payment(16)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.95 Letter Agreement, dated February 21, 1995, between William S. Sudhaus and Castle Energy
Corporation(17)
10.96 Letter Agreement, dated February 24, 1995, between William S. Sudhaus and Castle Energy
Corporation(17)
10.97 Powerine Petroleum Sale and Storage Agreement, dated April 8, 1995, between Wickland Oil
Company and Powerine Oil Company(17)
10.98 The Castle Agreement, dated April 8, 1995, among Wickland Oil Company, Castle Energy
Corporation, and Indian Powerine L.P.(17)
10.99 Security Agreement, dated April 8, 1995, between Powerine Oil Company and Wickland Oil
Company(17)
10.100 Supplemental Letter Agreement, dated April 13, 1995, between Powerine Oil Company and Wickland
Oil Company amending the Powerine Petroleum Sale and Storage Agreement(17)
10.101 Payoff Loan and Pledge Agreement, dated April 13, 1995, among Powerine Oil Company, CEC, Inc.,
Castle Energy Corporation, Metallgesellschaft Corp., MG Refining & Marketing, Inc., and MG Trade
Finance Corp.(17)
10.102 Promissory Note, dated April 13, 1995, by CEC, Inc. in favor of Metallgesellschaft Corp., in the
principal amount of $10,000,000(17)
10.103 Letter Agreement, dated May 10, 1995, between John D. R. Wright and Castle Energy
Corporation(17)
10.104 Letter Agreement, dated May 10, 1995, between William S. Sudhaus and Castle Energy Corporation
(17)
10.105 Payoff Agreement, dated May 25, 1995, between Indian Refining Limited Partnership, Indian
Refining & Marketing, Inc., Castle Energy Corporation, Indian Powerine L.P., Metallgesellschaft
Corp., MG Refining and Marketing, Inc., and MG Trade Finance Corp.(17)
10.106 Supplemental Letter Agreement, dated June 1, 1995, between Powerine Oil Company, Castle Energy
Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum
Sale and Storage Agreement(17)
10.107 Supplemental Letter Agreement, dated June 30, 1995, between Powerine Oil Company, Castle Energy
Corporation, Indian Powerine L.P., CEC, Inc. and Wickland Oil Company to the Powerine Petroleum
Sale and Storage Agreement(17)
10.108 Line of Credit Agreement, dated May 25, 1995, between
Indian Oil Company, BT Commercial Corporation,
MeesPierson N.V., and Bankers Trust Company(17)
10.109 Borrower Security Agreement, dated May 25, 1995, by Indian Oil Company in favor of BT
Commercial Corporation(17)
10.110 Guaranty Agreement, dated May 25, 1995, made by Castle Energy Corporation, Castle Production
Resource Company, and Castle Production Company in favor of BT Commercial Corporation(17)
10.111 Stock and Asset Purchase Agreement, dated November 21, 1995, among Castle Energy Corporation,
Indian Refining I, Limited Partnership, Indian Refining and Marketing I, Inc. and AM West G.P., Inc.
10.112 Agreement and Plan of Merger by and among Energy Merchant Corp., POC Acquisition Corporation,
Powerine Holding Corp., Castle Energy Corporation and Powerine Oil Company, dated January 10,
1996.
10.113 Letter Agreement, dated January 3, 1996, among Castle Energy Corporation, Indian Refining and
Marketing I, Inc., Powerine Oil Company, Indian Refining I., L.P. and William S. Sudhaus regarding
Mr. Sudhaus' resignation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
10.114 Letter Agreement, dated January 22, 1996, among Castle Energy Corporation, Powerine Oil
Company, Indian Refining and Marketing I, Inc., IP Oil Company and David M. Hermes regarding
Mr. Hermes' resignation.
10.115 Letter Agreement, dated January 29, 1996, between Indian Refining and Marketing Company, Indian
Refining & Marketing Inc., Indian Refining Limited Partnership and John D. R. Wright III regarding
Mr. Wright's termination.
10.116 Amendment No. 1 to Stock and Asset Purchase Agreement Dated as of November 21, 1995.
11.1 Statement re: Computation of Earnings Per Share
21 List of subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ryder Scott Company
23.3 Consent of Huntley & Huntley
27 Financial Data Schedule
</TABLE>
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<PAGE>
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the last
quarter of the Company's fiscal year ended September 30, 1995
<TABLE>
<CAPTION>
Date Item
---- ----
<S> <C> <C>
(i) September 30, 1995 Item 2. Acquisition or Disposition of Assets
Item 7 Financial Statements, Pro Forma Financial Information and Exhibits
- ----------
** The confidential portion of this document has been omitted and filed with the Securities and Exchange Commission
(1) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1990
(2) Incorporated by reference to the Registrant's Form 10-Q for the fiscal third quarter ended June 30, 1991
(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1991
(4) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended December 31, 1991
(5) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1992
(6) Incorporated by reference to the Registrant's Form 8-K, dated December 3, 1992
(7) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended March 31, 1993
(8) Incorporated by reference to the Registrant's Form S-1 (Registration Statement), dated September 29, 1993
(9) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1993
(10) Incorporated by reference to the Registrant's Form 10-Q for the second quarter ended March 31, 1994
(11) Incorporated by reference to the Registrant's Form 10-Q/A for the third quarter ended June 30, 1994
(12) Incorporated by reference to the Registrant's Form 8-K, dated August 31, 1994.
(13) Incorporated by reference to the Registrant's Form 8-K, dated November 3, 1994.
(14) Incorporated by reference to the Registrant's Form 8-K, dated December 9, 1994.
(15) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended September 30, 1994.
(16) Incorporated by reference to the Registrant's Form 10-Q for the first quarter ended December 31, 1994.
(17) Incorporated by reference to the Registrant's Form 10-Q for the third quarter ended June 30, 1995.
</TABLE>
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<PAGE>
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: March 12, 1996 By: /s/ Joseph L. Castle
- ----------------------------- -------------------------------
Joseph L. Castle II
Chairman of the Board
and Chief Executive Officer
Date: March 12, 1996 By: /s/ Richard E. Staedtler
- ----------------------------- -------------------------------
Richard E. Staedtler
Senior Vice President and
Chief Financial 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
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Joseph L. Castle
- --------------------------- Chairman of the Board and Chief Executive March 12, 1996
Joseph L. Castle II Officer and Director
(Principal Executive Officer)
/s/ Martin R. Hoffmann
- --------------------------- Director March 13, 1996
Martin R. Hoffmann
/s/ William S. Sudhaus
- -------------------------- Director March 13, 1996
William S. Sudhaus
/s/ Sidney F. Wentz
- -------------------------- Director March 13, 1996
Sidney F. Wentz
</TABLE>
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<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
(February 29, 1996)
JOSEPH L. CASTLE II WILLIAM S. SUDHAUS
Director Director
Chairman & Chief Executive Officer President of TALON Resources
MARTIN R. HOFFMANN SIDNEY F. WENTZ
Director Director
Senior Visiting Fellow at the Center Chairman of The Robert Wood Johnson
for Technology , Policy and Industrial Foundation
Development of the Massachusetts
Institute of Technology
OPERATING OFFICERS
JOSEPH L. CASTLE II RICHARD E. STAEDTLER
Chairman & Chief Executive Officer Chief Financial Officer
STEVEN J. GRENFELL
Treasurer and Controller
-89-
<PAGE>
PRINCIPAL OFFICES
Headquarters Drilling And Operating
Castle Energy Corporation Castle Exploration Company, Inc.
One Radnor Corporate Center 1815 Washington Road
Suite 250 Pittsburgh, PA 15241-1423
100 Matsonford Road
Radnor, PA 19087
Exploration And Production Natural Gas Transmission and Marketing
Castle Texas Production Limited
Partnership Castle Texas Pipeline Limited Partnership
2410 State Highway, 322 North 2410 State Highway, 322 North
Henderson, Texas 75652 Henderson, Texas 75652
CEC Gas Marketing Limited Partnership
2410 State Highway, 322 North
Henderson, Texas 75652
AGENTS
Counsel Independent Reservoir Engineers
Duane, Morris & Heckscher Huntley & Huntley, Inc.
1 Liberty Place, 42 Floor 340 Mansfield Avenue
Philadelphia, PA 19103-7396 Pittsburgh, PA 15220
Independent Accountants Ryder Scott and Company
600 Seventeenth Street, Suite 900N
Price Waterhouse LLP Denver, Colorado 80202
Thirty South Seventeenth Street
Philadelphia, PA 19103
Registrant and Transfer Agent
American Stock Transfer
40 Wall Street, 46th Floor
New York, New York 10005
-90-
<PAGE>
STOCK AND ASSET PURCHASE AGREEMENT
dated
November 21, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
Page
I. DEFINITIONS .................................................. 1
1.1 Definitions .................................................. 1
II. SALE OF STOCK AND ASSETS ..................................... 9
2.1 Sale of Stock ................................................ 9
2.2 Sale of Assets ............................................... 9
2.3 Assumption of Liabilities .................................... 10
2.4 "As Is" and "Where Is" ....................................... 11
III. PURCHASE PRICE ............................................... 11
3.1 Purchase Price ............................................... 11
3.2 Allocation ................................................... 12
IV. REPRESENTATIONS AND WARRANTIES OF THE SELLERS ................ 12
4.1 Organization and Good Standing ............................... 12
4.2 Authorization, Enforceability ................................ 12
4.3 Consents and Approvals ....................................... 13
4.4 No Violation ................................................. 13
4.5 Acquired Corporation ......................................... 13
4.6 Purchased Assets ............................................. 14
4.7 Compliance With Laws ......................................... 14
4.8 Employee Relations and Employee Benefit Plans; ERISA ......... 14
4.9 Financial Condition .......................................... 17
4.10 Taxes ........................................................ 18
4.11 Insurance .................................................... 20
4.12 No Broker .................................................... 20
4.13 Accuracy of Information ...................................... 20
V. REPRESENTATIONS AND WARRANTIES OF BUYER ...................... 20
5.1 Organization and Good Standing ............................... 20
5.2 Authorization; Enforceability ................................ 20
5.3 Consents and Approvals ....................................... 21
5.4 No Violation ................................................. 21
5.5 No Broker .................................................... 21
5.6 Subsequent Sale .............................................. 21
VI. TAX MATTERS .................................................. 21
i
<PAGE>
Page
6.1 Access to Information .......................................... 21
6.2 Tax Indemnification ............................................ 22
6.3 Transfer Taxes ................................................. 22
6.4 Post-Closing Audits and Other Proceedings ...................... 23
6.5 Certain Consolidated Return Matters ............................ 23
VII. COVENANTS OF SELLERS ........................................... 23
7.1 Access to Information .......................................... 23
7.2 Actions Prior to Closing Date .................................. 24
7.3 Consents and Approvals ......................................... 25
7.4 Confidentiality ................................................ 25
7.5 Insurance ...................................................... 26
7.6 Names .......................................................... 26
7.7 Transfer of Retirement Plans ................................... 26
7.8 DB Plan Funding ................................................ 27
7.9 Intercompany Indebtedness ...................................... 27
7.10 Commercially Reasonable Efforts; Cooperation ................... 28
7.11 Use of Asset Purchase Price; Payment of Creditors .............. 28
7.12 Escrow Agreement ............................................... 28
7.13 Use of Radnor Space ............................................ 28
7.14 Reimbursement for Inventory Liquidation ........................ 29
VIII. COVENANTS OF BUYER ............................................. 29
8.1 Consents and Approvals ......................................... 29
8.2 Confidentiality ................................................ 29
8.3 Transfer of Retirement Plans ................................... 30
8.4 Reimbursement for Real Estate Taxes ............................ 31
8.5 Assistance with Inventory Liquidation .......................... 31
8.6 Insurance Reimbursements and Payments .......................... 31
8.7 Employee Matters ............................................... 31
8.8 Commercially Reasonable Efforts; Cooperation ................... 32
IX. CONDITIONS TO OBLIGATIONS OF BUYER ............................. 32
9.1 Truth of Representations and Warranties ........................ 32
9.2 Compliance with Covenants ...................................... 32
9.3 Absence of Suit ................................................ 32
9.4 Receipt of Consents and Approvals .............................. 33
9.5 Proceedings and Instruments Satisfactory, Certificates ......... 33
9.6 Intercompany Indebtedness ...................................... 33
9.7 Deliveries at Closing .......................................... 33
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Page
9.8 No Material Adverse Change .................................... 33
9.9 Bank Consents ................................................. 33
9.10 Mobil Consent ................................................. 33
9.11 Platinum Sale Documents ....................................... 34
X. CONDITIONS TO OBLIGATIONS OF THE SELLERS ...................... 34
10.1 Truth of Representations and Warranties ....................... 34
10.2 Compliance with Covenants ..................................... 34
10.3 Absence of Suit ............................................... 34
10.4 Receipt of Consents and Approvals ............................. 34
10.5 Proceedings and Instruments Satisfactory; Certificates ........ 34
10.6 Intercompany Indebtedness ..................................... 34
10.7 Equity Contributions and Undertaking .......................... 35
10.8 Deliveries at Closing ......................................... 35
10.9 Platinum Sale Documents ....................................... 35
10.10 Bank Consents ................................................. 35
10.11 Mobil Consent ................................................. 35
XI. INDEMNIFICATION ............................................... 35
11.1 Requirement of Indemnification ................................ 35
11.2 Procedures Relating to Indemnification ........................ 36
11.3 Defense of Third-Party Claim .................................. 38
11.4 Payment ....................................................... 38
11.5 Limitation on Indemnification ................................. 38
XII. CLOSING ....................................................... 39
12.1 Time and Place ................................................ 39
12.2 Items to be Delivered by the Sellers .......................... 39
12.3 Items to be Delivered by Buyer ................................ 41
XIII. TERMINATION ................................................... 43
13.1 Termination ................................................... 43
13.2 No Other Transaction .......................................... 43
XIV. AMENDMENT AND WAIVER .......................................... 44
14.1 Amendment ..................................................... 44
14.2 Extension; Waiver ............................................. 44
XV. MISCELLANEOUS ................................................. 44
15.1 Notices ....................................................... 44
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Page
15.2 Governing Law ................................... 45
15.3 Successors and Assigns .......................... 45
15.4 Partial Invalidity .............................. 46
15.5 Execution in Counterparts ....................... 46
15.6 Titles and Headings ............................. 46
15.7 Entire Agreement ................................ 46
15.8 Announcements ................................... 46
15.9 Construction .................................... 47
15.10 Jurisdiction .................................... 47
15.11 Further Actions ................................. 47
15.12 Shell Litigation ................................ 47
15.13 Expenses ........................................ 47
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EXHIBITS
--------
A Escrow Agreement
B Note
C Mortgage
D Platinum Sale Documents
SCHEDULES
---------
1.1A Sellers' Knowledge Persons
1.1B Outstanding Liens
1.1C Trade Payables
1.1D Other Liabilities
2.1 Shares
2.2A Real Property
2.2B Insurance Policies
2.2C Tank Bottoms
2.2D Excluded Receivables - Excluded Contracts -
Other Excluded Assets
4.3 Sellers' Required Filings and Approvals
4.4 Sellers' Consents
4.8 ERISA Matters
4.9 IRC Bank Accounts
4.10 Tax Matters
5.3 Buyer's Required Filings and Approvals
8.4 Real Estate Taxes
8.7 Employees
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STOCK AND ASSET PURCHASE AGREEMENT
----------------------------------
STOCK AND ASSET PURCHASE AGREEMENT (as the same may be amended, the
"Purchase Agreement"), dated as of November 21, 1995, among CASTLE ENERGY
CORPORATION, a Delaware corporation ("Castle"), INDIAN REFINING I LIMITED
PARTNERSHIP, an Illinois limited partnership ("IRLP"), INDIAN REFINING &
MARKETING I, INC., an Illinois corporation and the sole general partner of IRLP
("IRMI") (IRMI and IRLP are collectively referred to as the "Asset Sellers"),
and AM WEST GP, INC., a Delaware corporation ("Buyer").
WITNESSETH:
-----------
WHEREAS, Castle owns directly or indirectly all of the issued and
outstanding partnership interests or capital stock of each of the Asset Sellers;
and
WHEREAS, Castle also owns, beneficially and of record, all of the
outstanding capital stock of Indian Refining Company, a Delaware corporation
(the "Acquired Corporation" or "IRC"); and
WHEREAS, Castle and the Asset Sellers wish to sell to Buyer and Buyer
wishes to purchase from the Asset Sellers certain of the assets of the Asset
Sellers upon the terms and conditions hereinafter set forth; and
WHEREAS, Castle wishes to sell to Buyer and Buyer wishes to purchase
from Castle all of the capital stock of the Acquired Corporation upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements set forth herein, and intending to be legally
bound, Castle, the Asset Sellers and Buyer hereby agree as follows:
I. DEFINITIONS
Section 1.1 Definitions. When used in this Purchase Agreement, the
following words or phrases have the following meanings:
"Acquired Corporation" shall have the meaning set forth in the
preamble hereto.
"Acquisition Proposal" shall mean any proposal, other than as
contemplated by this Purchase Agreement, for the acquisition of the Refinery or
Terminal, whether through a merger, consolidation, reorganization, other
business combination, recapitalization, acquisition of any shares of capital
stock or Assets, or otherwise.
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"Affiliate" shall mean a Person that directly, or indirectly through
one or more intermediaries, controls, is controlled by or is under common
control with another Person or beneficially owns or has the power to vote or
direct the vote of 20% or more of any class of voting stock or of any form of
voting equity interest of such other Person in the case of a Person that is not
a corporation. For purposes of this definition, "control," including the terms
"controlling" and "controlled," means the power to direct or cause the direction
of the management and policies of a Person, directly or indirectly, whether
through the ownership of securities or partnership or other ownership interests,
by contract or otherwise.
"Asset Purchase Price" shall have the meaning set forth in Section 3.1
hereof.
"Asset Sellers" shall have the meaning set forth in the preamble
hereto.
"Assets" shall mean all rights, titles, franchises, and interests in
and to every species of property, real, personal, and mixed, tangible and
intangible, including, without limitation, cash, cash equivalents, receivables,
real property, together with buildings, structures, and the improvements
thereon, fixtures contained therein and appurtenances thereto, and easements and
other rights relating thereto, machinery, equipment, supplies, parts, spare
parts, furniture, fixtures, leasehold improvements, inventory (including without
limitation, "tank bottoms"), vehicles, leases, licenses, insurance and similar
policies, warranties, indemnities, guaranties, permits, approvals,
authorizations, joint venture agreements, Contracts, processes, trade secrets,
know-how, computer hardware and software, computer programs and source codes,
protected formulae, all other Intellectual Property, goodwill, prepaid expenses,
records, files, claims (including, without limitation, insurance and litigation
claims and causes) and privileges, and any other assets whatsoever.
"Assignee" means a Delaware limited partnership of which Buyer shall
be the general partner, to which Buyer assigns at or prior to the Closing this
Agreement and the Escrow Agreement and all of its rights and obligations
thereunder and under the documents contemplated hereby.
"Assumed Contracts" shall mean all Contracts of IRLP including,
subject to the provisions of Section 9.10, the Mobil Contract, but excluding the
Excluded Contracts.
"Assumed Liabilities" shall have the meaning set forth in Section 2.3
hereof.
"Balance Sheet" shall have the meaning set forth in Section 4.9
hereof.
"Balance Sheet Date" shall have the meaning set forth in Section 4.9
hereof.
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"Benefit Plans" shall have the meaning set forth in Section 4.8
hereof.
"Buyer" shall have the meaning set forth in the preamble hereto.
"Buyer Documents" shall have the meaning set forth in Section 5.2
hereof.
"Buyer Indemnitees" shall mean Buyer, its Affiliates, and their
respective officers, directors, employees, counsel, agents, investment bankers,
accountants, and Affiliates.
"Castle" shall have the meaning set forth in the preamble hereto.
"Castle Employees" shall have the meaning set forth in Section 7.7
hereof.
"Castle Entities" shall mean, collectively, Castle, the Asset Sellers,
and the Acquired Corporation.
"Castle Plan" shall have the meaning set forth in Section 7.7 hereof.
"Castle Subsidiaries" shall mean, collectively, IRLP, IRMI and IRC.
"Closing" and "Closing Date" shall have the respective meanings set
forth in Section 12.1 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compliance Cost Agreement" shall mean the Compliance Cost Agreement,
dated April 10, 1990, between IRC and IRLP.
"Consolidated Group" shall have the meaning set forth in Section 4.10
hereof.
"Contract" shall mean a contract, indenture, bond, note, mortgage,
deed of trust, lease, agreement or written commitment.
"Cooling Tower Claim" shall have meaning set forth in Section 7.5
hereof.
"Damages" shall mean losses, costs, liabilities, reasonable expenses,
and/or other damages (including, without limitation, reasonable attorneys' fees
and expenses and any and all reasonable expenses whatsoever incurred in
investigating, preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation).
"DB Plan" shall have the meaning set forth in Section 4.8 hereof.
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"DB Plan and Trust" shall have the meaning set forth in Section 4.8
hereof.
"Determination Letter" shall have the meaning set forth in Section 4.8
hereof.
"Environmental Claim" shall mean any claim by a Person alleging actual
or potential Liability of the Castle Subsidiaries or any other Seller Indemnitee
but in any case only if relating to the Refinery and/or the Terminal for any
investigatory cost, cleanup cost, governmental response cost, natural resources
damage, property damage, personal injury, or penalty, and arising out of, based
on, or resulting from (a) the presence, transport, disposal, discharge, or
release of any Materials of Environmental Concern at any location (including,
without limitation, accrued liabilities for hazardous waste removal), whether or
not owned by Castle or any of the Castle Subsidiaries, as the case may be, or
(b) circumstances forming the basis of any violation or alleged violation of any
Environmental Law. Notwithstanding the foregoing, under no circumstances shall
Environmental Claims include any Liabilities of any Castle Subsidiaries or any
other Seller Indemnitees which related to the Powerine Refinery's (located in
Santa Fe Springs, California) business, operation or Assets (as now or at any
time prior hereto instituted), the natural gas business, the exploration and
production business or any other business, properties, Assets or affairs of
Castle or any of its Affiliates (or any of their predecessors in interest) other
than the Refinery or the Terminal.
"Environmental Law" shall mean all Laws relating to pollution or
protection of human health, the environment, including, without limitation,
ambient air, surface water, ground water, land surface, or subsurface strata,
and including, without limitation, Laws relating to emissions, discharges,
releases or threatened releases, or the presence of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, existence, treatment, storage, disposal, transport, recycling, reporting,
or handling of Materials of Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to Castle, any trade or
business that together with Castle or any of the Castle Subsidiaries would be
deemed a "controlled group" within the meaning of Section 4001(a)(14) of ERISA.
"Escrow Agreement" shall mean an escrow agreement to be dated the
Closing Date among IRLP, Castle, Buyer, and an independent entity reasonably
acceptable to the parties acting as escrow agent, in the form of Exhibit A
attached hereto and by this reference made a part hereof (with such changes
thereto as are required by such escrow agent and are reasonably acceptable to
the parties).
"Excluded Contracts" shall mean the Contracts listed on Schedule 2.2D
attached hereto.
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"GAAP" shall mean United States generally accepted accounting
principles consistently applied.
"Governmental Entity" shall mean a court, legislature, governmental
agency, commission, or administrative or regulatory authority or
instrumentality, domestic foreign.
"GWC" shall have the meaning set forth in Section 10.7 hereof.
"Indian Benefit Plans" shall have the meaning set forth in Section 4.8
hereof.
"Indian 401(k) Plan" shall have the meaning set forth in Section 4.8
hereof.
"Indian 401(k) Plan and Trust" shall have the meaning set forth in
Section 4.8 hereof.
"Intellectual Property" shall mean marks, names, trademarks, service
marks, patents, patent rights, assumed names, logos, copyrights, trade names,
inventions, protected formulae, processes, proprietary information, trade
secrets, computer software, as well as related documentation and manuals, all
applications for registration of such items with any Governmental Entity, and
all licenses and research and development relating thereto.
"Intervening Lien" shall mean any Lien which is not an Outstanding
Lien and encumbers any of the Purchased Assets as of the Closing Date.
"IOC" shall mean Indian Oil Company, an Illinois corporation which is
a wholly-owned Subsidiary of Castle.
"IRLP" shall mean Indian Refining I Limited Partnership, an Illinois
limited partnership.
"IRC" shall have the meaning set forth in the preamble hereto.
"IRS" shall mean the Internal Revenue Service.
"Knowledge" of or with respect to (a) any individual shall mean the
actual knowledge of such individual and any knowledge such individual reasonably
should have had under the circumstances; and (b) Sellers, shall mean the
Knowledge of the individuals listed on Schedule 1.1A attached hereto.
"Law" shall mean a law, ordinance, rule, or regulation enacted or
promulgated, or an Order issued or rendered, by any Governmental Entity, now or
hereafter.
"Liability" shall mean a liability, obligation, claim, or cause of
action of any kind or nature whatsoever, whether absolute, accrued, contingent,
or other and whether known or unknown.
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"License" shall mean a license, certificate of authority, permit, or
other authorization to transact an activity or business or to use an asset or
process issued or granted by a Governmental Entity.
"Lien" shall mean a lien, mortgage, deed to secure debt, pledge,
security interest, lease, sublease, charge, levy, or other encumbrance of any
kind.
"Litigation Expenses" shall mean all out-of-pocket expenses,
including, without limitation, reasonable legal fees, incurred in investigating,
preparing, prosecuting, defending or negotiating the settlement of the Shell
Litigation.
"Materials of Environmental Concern" shall mean chemicals, pollutants,
contaminants, wastes, toxic or hazardous substances, petroleum, petroleum
additives, petroleum intermediates, and petroleum products subject to
environmental regulation.
"MG Swap Agreement" shall mean the Natural Gas Swap Agreement dated as
of October 14, 1994 between MG Natural Gas Corp. and IRLP.
"Mobil" shall have the meaning set forth in Section 9.10 hereof.
"Mobil Contract" shall have the meaning set forth in Section 9.10
hereof.
"Mortgage" shall have the meaning set forth in Section 3.1 hereof.
"Multiemployer Plan" means a "multiemployer plan" within the meaning
of Section 4001(a)(3) of ERISA.
"Order" shall mean an order, writ, ruling, judgment, injunction or
decree of, or any stipulation to or agreement with, any arbitrator, mediator or
Governmental Entity.
"Outstanding Liens" shall mean the Liens identified in Schedule 1.1C
attached hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Permitted Liens" shall mean (i) easements, rights-of-way,
restrictions, zoning restrictions, and other similar encumbrances on or minor
imperfections in title to real property which do not materially detract from the
value or use thereof, and (ii) Liens created by the Buyer.
"Person" shall mean an individual, corporation, partnership, limited
liability company, association, joint stock company, Governmental Entity,
business trust, unincorporated organization or other legal entity.
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"Platinum Sale Documents" shall mean the Bill of Sale, the Security
Agreement and the Note, each dated as of the Closing Date, between IOC and Buyer
pursuant to which Buyer will purchase platinum catalyst from IOC, in the forms
attached hereto as Exhibits D-1, D-2 and D-3.
"Purchase Agreement" shall have the meaning set forth in the preamble
hereto.
"Purchased Assets" shall have the meaning set forth in Section 2.2
hereof.
"Qualified Plan" shall have the meaning set forth in Section 4.8
hereof.
"Refinery" shall mean the crude oil refinery owned by IRLP and located
in Lawrenceville, Illinois, including the underlying land and all related
properties owned by IRLP.
"Required Filings and Approvals" of a party shall mean any filing of
this Agreement with and the approval of such by all Governmental Entities and
such other applications, registrations, declarations, filings, authorizations,
Orders, consents, and approvals as may be required to be made or obtained by
such party from any Person prior to or to permit consummation of the
Transactions.
"Relevant Group" shall have the meaning set forth in Section 4.10
hereof.
"Schedule 1.1B" shall mean a schedule dated the date hereof and
attached hereto identifying all Persons known to have a Lien on any of the
Purchased Assets as of the date of this Agreement, and, in each case, the amount
secured by such Lien.
"Schedule 1.1C" shall mean a schedule dated the date hereof and
attached hereto identifying all known Liabilities of IRLP as of the date hereof
for trade payables (other than Liabilities secured by a Lien on any of the
Purchased Assets), and, in each case, the amount of such Liability.
"Schedule 1.1D" shall mean a schedule dated the date hereof and
attached hereto identifying all known Liabilities (other than Assumed
Liabilities) of IRLP at the date hereof not included in Schedule 1.1B or
Schedule 1.1C; provided that failure to identify a Liability of IRLP on Schedule
1.1D shall not mean that the Liability so omitted is an Assumed Liability.
"Second Stage Financing" shall mean the completion by Buyer of the
requisite equity, long-term debt and working capital financings for the
operation of the Refinery.
"Seller Indemnitees" shall mean the Sellers, any present or future
parent or Subsidiary of the Sellers, and their respective officers, directors,
employees, counsel, agents, investment bankers, accountants, and Affiliates.
Seller Documents" shall have the meaning set forth in Section 4.2
hereof.
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"Seller Note" shall have the meaning set forth in Section 3.1 hereof.
"Sellers" shall mean Castle and the Asset Sellers.
"Shares" shall mean the issued and outstanding shares of capital stock
of the Acquired Corporation.
"Shell" shall mean Shell Canada Limited, a Canadian corporation,
together with its wholly owned Subsidiary, Salmon Resources Ltd., a Wyoming
corporation.
"Shell Contract" shall mean the Long Term Supply Agreement, dated as
of November 1, 1992, as amended, among Shell, IRLP, IRMI and MG Refining and
Marketing, Inc.
"Shell Litigation" shall mean (i) the litigation commenced by Shell in
the United States District Court for the Northern District of Illinois,
captioned Salmon Resources Ltd. and Shell Canada Limited v. MG Refining and
Marketing, Inc., Indian Refining Limited Partnership, and Indian Refining &
Marketing, Inc., (ii) any other litigation which may be brought by Shell raising
similar claims or requesting similar relief against IRLP, IRMI or Castle and
(iii) any counterclaims, cross-claims, or other claims or causes of action
relating to any litigation referred to in clause (i) or (ii).
"Subsidiary" of any Person shall mean any other corporation,
partnership, or other entity of which such Person, directly or through
Subsidiaries, owns shares of capital stock or partnership or other equity
interests which either (i) represent at least 50% of the common equity of such
entity or (ii) entitle such Person to cast at least a majority of the votes
entitled to be cast generally upon election of directors or other similar
governing body.
"Tax" shall mean any Federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, motor fuel, environmental, capital stock, franchise,
profits, gains, withholding, social security, unemployment, disability, real
property, personal property, sales, use, rental, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto or amendment thereof.
"Terminal" shall mean the terminal facility owned by IRLP and located
in Mt. Vernon, Indiana, including the underlying property and all related
properties owned by IRLP.
"Termination Date" shall mean that date which is 10 business days
after the last to occur of (i) the date this Purchase Agreement is executed by
the parties thereto and (ii) the date on which Castle shall have filed a
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complying notification report form pursuant to the requirements of the Hart
Scott Rodino Antitrust Improvements Act of 1976, as amended, with respect to the
Transactions.
"Title IV Plan" shall have the meaning set forth in Section 4.8
hereof.
"Third Party Claim" shall have the meaning as set forth in Section
11.2 hereof.
"Transactions" shall mean the transactions contemplated by the
Purchase Agreement.
"Treasury Regulations" shall mean the regulations promulgated by the
Secretary of the Treasury pursuant to the Code and any predecessor and successor
thereto.
"WARN Act" shall mean the Worker Adjustment and Retraining
Notification Act, 29 U.S.C. ss.ss. 2101-2109.
II. SALE OF STOCK AND ASSETS
Section 2.1 Sale of Stock. Subject to the terms and conditions of this
Purchase Agreement, on the Closing Date Castle shall, by appropriate instruments
of transfer, sell, transfer and convey to Buyer, and Buyer shall purchase from
Castle, all of the Shares, as listed on Schedule 2.1 attached hereto, free and
clear of all Liens.
Section 2.2 Sale of Assets. (a) Subject to the terms and conditions of
this Purchase Agreement, on the Closing Date the Asset Sellers shall sell,
transfer, and convey to Buyer, and Buyer shall purchase from the Asset Sellers,
by appropriate instruments of transfer, each and all of the Assets of the Asset
Sellers (the "Purchased Assets"), including, but not limited to, (i) all real
property owned by IRLP, including the real property identified on Schedule 2.2A
hereto, together with all improvements thereon, including the Refinery and the
Terminal, (ii) all personal property, equipment, spare parts and supplies at or
used in the business of the Refinery or the Terminal, (iii) the rights (but not
the obligations) of IRLP under the Assumed Contracts (including the insurance
policies listed on Schedule 2.2B hereto as insurance policies to be transferred
to Buyer), including all warranty, indemnity and similar rights and provisions
set forth in the Assumed Contracts in favor of the Sellers, but excluding the
receivables thereunder which are identified on Schedule 2.2D hereto, (iv) the
Cooling Tower Claim and (v) the tank bottoms listed on Schedule 2.2C hereto
(which may not be owned by IRLP prior to the Closing Date); provided, however,
that the Purchased Assets shall not include (A) the partnership interests in
IRLP, (B) any accounts receivable of the Asset Sellers from Castle or any of its
Affiliates, (C) cash and cash equivalents of the Asset Sellers (except any cash
or cash equivalents collateralizing any obligations of the Acquired
Corporation), (D) any trade accounts receivable of the Asset Sellers and the
excluded receivables identified on Schedule 2.2D, (E) the Excluded Contracts,
(F) the insurance policies of IRLP identified on Schedule 2.2B hereto as
insurance policies not to be transferred to Buyer, and (G) any other excluded
asset specifically identified in Schedule 2.2D hereto. On the Closing Date, the
Asset Sellers shall sell, transfer, and convey the Purchased Assets to Buyer
free and clear of all Liens other than (y) Permitted Liens and (z), subject to
the provisions of Sections 7.11 and 7.12 hereof and of the Escrow Agreement, the
Outstanding Liens.
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(b) To the extent that the assignment by the Asset Sellers to Buyer of
any Contract to be assigned to Buyer hereunder shall require the consent of a
party other than a Castle Entity which has not been obtained by the Closing,
this Purchase Agreement shall not constitute an agreement to assign such
Contract unless and until such consent is obtained. Until such time as the
Sellers are able to obtain a consent required with respect to any Contract, such
Contract shall not be included in the Purchased Assets or the Assumed
Liabilities and the Sellers shall use their commercially reasonable efforts to
obtain a consent or enter into an arrangement to provide to Buyer the benefits
under such Contract.
Section 2.3 Assumption of Liabilities. Subject to the terms and
conditions of this Purchase Agreement, on the Closing Date Buyer shall, by
appropriate instruments, assume the following Liabilities of the Asset Sellers
identified in clauses (a) through (e) below (the "Assumed Liabilities"): (a)
Liabilities of the Asset Sellers relating to Environmental Claims; (b)
Liabilities to the Indian 401(k) Plan and Trust or the DB Plan and Trust; (c)
Liabilities of IRLP to IRC under the Compliance Cost Agreement; (d) all
obligations of IRLP to be performed under the Assumed Contracts after the
Closing Date, exclusive of (i) payments of money to be made by the Sellers after
the Closing Date, the obligation for which accrued on or prior to the Closing
Date, (ii) obligations of the Sellers to indemnify other parties to the Assumed
Contracts for breaches of, or acts or omissions under, the Assumed Contracts by
the Sellers or their Affiliates prior to the Closing Date, and (iii) Liabilities
subject to indemnification by the Sellers under Section 11.1(a); and (e) any
Liabilities of the Asset Sellers (and to the extent set forth in the definition
of "Shell Litigation," of Castle) in the Shell Litigation.
Buyer does not assume any Liabilities of the Asset Sellers other than
the Assumed Liabilities. Liabilities that are not assumed and for which Buyer
and its Affiliates shall have no responsibility include but are not limited to
the following: (i) Liabilities of the Asset Sellers arising under the
partnership agreement of IRLP to IRLP's partners, (ii) any Liabilities of the
Asset Sellers to Castle or any of its Affiliates other than Liabilities arising
under the Compliance Cost Agreement, (iii) Liabilities for Taxes of Castle, the
Asset Sellers, any of their respective Affiliates or the Consolidated Group or
any Relevant Group of which one or more of the Castle Entities is or was a
member, including without limitation any liability for Taxes of any such Castle
Entity as a withholding agent or transferee, or a Liability for Taxes arising by
Contract or otherwise, (iv) Liabilities for guaranteeing, endorsing or otherwise
becoming liable or responsible for any indebtedness, lease or other obligation
of Castle or any of its Affiliates, (v) Liabilities relating to employment
and/or severance agreements, the WARN Act or any similar laws, rules and/or
regulations, options, stock appreciation rights and similar arrangements and/or
rights between any of the Castle Entities or any of their Affiliates and their
respective directors, executives, employees and/or personnel, except as provided
in Section 8.7, (vi) any trade and/or other accounts payable of the Asset
Sellers, including without limitation, those payables and other Liabilities
identified in Schedule 1.1B and Schedule 1.1C, and the Liabilities set forth in
Schedule 1.1D, (vii) Liabilities relating to the MG Swap Agreement, and (viii)
Liabilities under any Contracts other than as expressly set forth in clauses (b)
through (d) above.
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Section 2.4 "As Is" and "Where Is". Except as otherwise expressly
provided in this Agreement, Buyer shall acquire the Purchased Assets, the
Shares, and, indirectly, the Assets of the Acquired Corporation "AS IS" AND
"WHERE IS." EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT OR
ANY EXHIBITS OR ATTACHMENTS HERETO, ANY AND ALL OTHER REPRESENTATIONS AND
WARRANTIES WITH RESPECT TO THE PURCHASED ASSETS, THE SHARES, AND SUCH OTHER
ASSETS, WHETHER EXPRESS OR IMPLIED, ARE HEREBY DISCLAIMED, INCLUDING ANY
REPRESENTATIONS OR WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE.
III. PURCHASE PRICE
Section 3.1 Purchase Price. The purchase price to be paid by Buyer to
Castle for the Shares shall be $1.00. In addition to the assumption of the
Assumed Liabilities, the purchase price to be paid by Buyer to IRLP for the
Purchased Assets (the "Asset Purchase Price") shall be equal to: (a) $3.0
million in cash to be paid at the Closing, (b) $225,000 in cash to be paid upon
consummation and funding of the Second Stage Financing, it being understood that
said $225,000 payment is contingent upon the funding of the Second Stage
Financing, and (c) $5.0 million in the form of a limited recourse promissory
note (the "Seller Note") issued to IRLP at the Closing in the form of Exhibit B
hereto, which Seller Note shall be secured by a first mortgage Lien on the
Refinery (but not the Terminal) in the form of Exhibit C attached hereto (the
"Mortgage"), it being understood and agreed that the payment obligations under
the Seller Note shall not be enforceable against any Assets of Buyer except the
Refinery. The principal amount of the Seller Note may be reduced in the
circumstances provided for in Section 7.11(b). The Asset Purchase Price shall be
held and disbursed solely in the manner specified in Sections 7.11 and 7.12 and
the Escrow Agreement.
Section 3.2 Allocation. The Asset Purchase Price shall be allocated
among the Purchased Assets in accordance with their relative fair market values,
as determined by Buyer. Buyer and Sellers agree to prepare and file their
federal income tax returns on a basis consistent with such allocation and agree
not to take a position inconsistent with such allocation in any other Tax return
or otherwise.
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IV. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Sellers jointly and severally represent and warrant to Buyer as
follows (it being understood that representations relating specifically to
Castle do not relate to any other Castle Entity):
Section 4.1 Organization and Good Standing. Each Castle Entity is a
corporation or limited partnership duly organized, validly existing, and, to the
extent applicable in the case of partnerships, in good standing under the Laws
of the state of its incorporation or organization, with all requisite corporate
or partnership power and authority to own, operate, and lease its properties and
to carry on its business as now being conducted. Each of the Castle Subsidiaries
is qualified or otherwise authorized to transact business, and is in good
standing, as a foreign corporation or limited partnership, in the respective
jurisdictions set forth in Schedule 4.1. To the Knowledge of Sellers, there is
no other jurisdiction in which the ownership of their Assets or the conduct of
their business by the Castle Subsidiaries makes such qualification necessary.
Except for the ownership by IRMI of its partnership interests in IRLP, the
Castle Subsidiaries do not directly or indirectly own any interest in any
Subsidiary or any other Person. Castle shall make available to Buyer, prior to
the Closing, true, correct, and complete copies of the Articles or Certificate
of Incorporation, bylaws, and minute books of the Acquired Corporation.
Section 4.2 Authorization, Enforceability. Each Seller has the
requisite corporate or partnership power and authority to enter into and
consummate the Transactions and to perform its obligations under the Purchase
Agreement and the other documents to be executed and delivered in connection
herewith to which such Seller is a party, including the Escrow Agreement (the
"Seller Documents"). The execution, delivery and performance of the Seller
Documents and the consummation of the Transactions have been duly approved and
authorized by the Board of Directors and stockholders of each Seller which is a
corporation and by IRMI as the general partner of IRLP. No other corporate or
partnership proceedings on the part of any Seller will be necessary to authorize
the Seller Documents and the Transactions. This Purchase Agreement and the other
Seller Documents have been, duly authorized by each Seller. This Purchase
Agreement has been, and at the Closing the other Seller Documents will have been
duly executed and delivered by each Seller and, assuming this Purchase Agreement
and the other Seller Documents are legal, valid, and binding obligation of
Buyer, constitutes or will constitute at Closing a legal, valid, and binding
obligation of each Seller, enforceable against each Seller in accordance with
its terms.
Section 4.3 Consents and Approvals. Listed on Schedule 4.3 hereof are
all of the Required Filings and Approvals of Castle and the Castle Subsidiaries
in connection with the execution and delivery of this Purchase Agreement and the
other Seller Documents and the consummation of the Transactions. At the Closing,
all such Required Filings and Approvals of Castle and the Castle Subsidiaries
will have been obtained, except any listed on a schedule to be delivered by
Sellers pursuant to Section 12.2(f).
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Section 4.4 No Violation. The execution, delivery, and performance of
this Purchase Agreement by the Sellers and the consummation by them of the
Transactions contemplated hereby will not (a) violate any provision of the
charter or by-laws or similar organizational documents of any of the Castle
Entities or (b) subject to obtaining the consents set forth on Schedule 4.4,
violate, conflict with, result in a breach of any provision of, constitute a
default or an event which, with notice or lapse of time or both, would
constitute a default under, result in the termination of or accelerate the
performance required by, result in a right of termination or acceleration under,
or result in the creation of any Lien upon any of the Shares or the Purchased
Assets under any of the terms of any Contract to which Castle or any of its
Subsidiaries is a party.
Section 4.5 Acquired Corporation. The authorized capital stock of the
Acquired Corporation consists of 100 Shares of common stock, of which 100 Shares
are issued and outstanding. All of the Shares have been duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially and
of record by Castle. There are no other shares of the capital stock of the
Acquired Corporation authorized, issued, or outstanding or reserved for
issuance, no outstanding preemptive rights or subscription rights with respect
to any such shares, and no outstanding options, warrants, rights, voting trusts,
convertible securities, or other agreements or commitments with respect to any
such shares. At the Closing, good and valid title to the Shares will pass to
Buyer free and clear of all Liens. The Acquired Corporation has or at the
Closing will have good and valid title to the Assets held by it, free and clear
of all Liens except the Permitted Liens.
Section 4.6 Purchased Assets. The Asset Sellers have or at the Closing
will have good and valid title to the Purchased Assets and at the Closing the
Asset Sellers will have full power and authority to transfer the Purchased
Assets to Buyer. At the Closing, good and valid title to the Purchased Assets
will pass to Buyer, free and clear of all Liens except the Permitted Liens.
Neither Castle nor any of its Subsidiaries other than the Castle Subsidiaries
owns, leases, or licenses any material Assets used in the conduct of the
business of, or otherwise relating to, the Refinery and/or the Terminal, except
for the inventory, the catalyst and receivables from third parties owned by IOC.
Section 4.7 Compliance With Laws. (a) Castle and its Subsidiaries have
obtained all Licenses required to be obtained by Castle or any of its
Subsidiaries for the conduct of the business of the Castle Subsidiaries as
presently conducted, except where the failure to have obtained any such Licenses
would not have a material adverse effect on the financial condition, operating
results, assets, properties, or business of any of the Castle Subsidiaries. All
such Licenses are in full force and effect, except to the extent failure to be
in effect would not be reasonably likely to have a material adverse effect on
the financial condition, operating results, Assets, properties, or business of
any of the Castle Subsidiaries, or the operation of the Refinery.
(b) Castle and its Subsidiaries have complied with and are in
compliance with all, and have not received any written notice of any claimed
violation of any, Laws applicable to the business of the Castle Subsidiaries,
excluding Environmental Laws, except where the failure to comply with, or the
violation of, any such Laws, excluding Environmental Laws, would not be
reasonably likely to have a material adverse effect on the financial condition,
operating results, Assets, properties, or business of any of the Castle
Subsidiaries, or the operation of the Refinery.
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Section 4.8 Employee Relations and Employee Benefit Plans; ERISA.
(a) None of the Castle Subsidiaries has entered into any
collective bargaining agreement. To the Knowledge of Sellers, (i) there is no
labor strike, dispute, slowdown, or work stoppage or lockout pending or
threatened against or affecting any of the Castle Subsidiaries, and (ii) no
union organizational campaign is in progress with respect to the employees of
any of the Castle Subsidiaries. There is no unfair labor practice, charge, or
complaint pending or, to the Knowledge of Sellers, threatened before the
National Labor Relations Board against any of the Castle Subsidiaries and no
charges with respect to or relating to any of the Castle Subsidiaries are
pending before the Equal Employment Opportunity Commission.
(b) (i) Schedule 4.8 attached hereto contains a true and
complete list of each "employee benefit plan," as defined in Section 3(3) of
ERISA, and each other employee benefit plan, welfare plan, program, agreement,
policy, or arrangement, including, without limitation, severance pay, salary
continuation for disability and consulting or other compensation agreements
("Benefit Plans"), sponsored, maintained, or contributed to or required to be
contributed to by the Asset Sellers within six years prior to the Closing Date
(the "Indian Benefit Plans").
(ii) With respect to each Indian Benefit Plan, Castle has
delivered to Buyer a true, correct, and complete copy of: (A) each writing
constituting a part of such Indian Benefit Plan, including, without limitation,
all plan documents, benefit schedules, trust agreements, and insurance contracts
and other funding vehicles; (B) the three most recent Annual Reports (Form 5500
Series) and accompanying schedule, if any; (C) the current summary plan
description, if any; (D) the three most recent annual financial reports, if any;
and (E) the most recent Determination Letter from the IRS, if any. The Annual
Reports (Form 5500 Series) with respect to each Indian Benefit Plan have been
properly filed, including the payment in full of any late fees, interest, and
penalties, if and to the extent applicable. Except as specifically provided in
the foregoing documents delivered to Buyer, there are no amendments to any
Indian Benefit Plan that have been adopted or approved nor have the Asset
Sellers or Castle undertaken or committed to make any such amendments; provided
that amendments to each Indian Benefit Plan that is intended to be a "qualified
plan" within the meaning of Section 401(a) of the Code ("Qualified Plans") that
are required by the Internal Revenue Service as a condition to the granting of a
favorable Determination Letter will be timely drafted under the supervision, and
at the expense, of Seller and adopted by Seller (if prior to Closing) or Buyer
(upon Buyer's reasonable approval and timely submission by Seller to Buyer)
prior to the end of the applicable remedial amendment period under Section
401(b) of the Code.
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(iii) Schedule 4.8 identifies each Qualified Plan. The Indian
Refining Limited Partnership 401(k) Plan (the "Indian 401(k) Plan" and, together
with the Assets thereof and its related trust agreement, the "Indian 401(k) Plan
and Trust") has been issued a favorable determination letter as to its current
qualified status (the "Determination Letter"). The Indian Refining Limited
Partnership Defined Benefit Pension Plan (the "DB Plan" and, together with the
Assets thereof and its related trust agreement, the "DB Plan and Trust") has not
been issued a favorable Determination Letter with respect to the amendments
required by the Tax Reform Act of 1986 and subsequent tax law changes. However,
a request to the Internal Revenue Service has been made on a timely basis. The
DB Plan remains within the applicable remedial amendment period under Section
401(b) of the Code for the adoption of such amendments and for obtaining a
favorable Determination Letter with respect to such amendments, as extended in
accordance with IRS Announcement 94-136.
(iv) All contributions required to be made to any Indian
Benefit Plan by applicable law or regulation or by any plan document or other
contractual under-taking, and all premiums due or payable with respect to
insurance policies funding any Indian Benefit Plan, for any period through the
date hereof have been timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof, have been fully reflected on
the financial statements of the Asset Sellers. The funding method used in
connection with the DB Plan is acceptable and the actuarial assumptions used in
connection with funding the DB Plan are reasonable. As of the last day of the
last plan year of the DB Plan and as of the Closing Date, the present value of
DB Plan assets exceeded the actuarial present value of accumulated benefit
obligations under the DB Plan, and the excess of present value of projected
benefit obligations over the fair value of plan assets did not and will not
exceed $1,500,000.
(v) Castle, the Asset Sellers and each Indian Benefit Plan
have complied, and are now in compliance, in all material respects with all
provisions of ERISA, the Code, and all Laws applicable to the Indian Benefit
Plans, except to the extent of amendments to the Qualified Plans which can be
adopted during the remedial amendment period. There is not now, nor do any
circumstances exist that could give rise to, any requirement for the posting of
security with respect to any Indian Benefit Plan or the imposition of any Lien
on the assets of any of the Castle Subsidiaries or any of their ERISA Affiliates
under ERISA or the Code.
(vi) Schedule 4.8 sets forth each Indian Benefit Plan (other
than a multiemployer plan) that is subject to Title IV of ERISA (a "Title IV
Plan"). Except as set forth on Schedule 4.8, no accumulated funding deficiency
or unpaid required installments within the meaning of Section 412 of the Code
exists, nor has there been issued a waiver or variance of the minimum funding
standards imposed by the Code with respect to any Title IV Plan, nor has any
Lien been created under Section 302(f) of ERISA or security been required under
Section 307 of ERISA, nor are any excise taxes due or hereafter to become due
under Section 4971 or 4972 of the Code with respect to the funding of any such
plan for any plan year or other fiscal period ending on or before the Closing
Date. With respect to each Title IV Plan, (A) there has not occurred any
reportable event within the meaning of Section 4043(b) of ERISA or the
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regulations thereunder, and (B) there exists no ground upon which the PBGC would
reasonably be expected to demand termination of any Title IV Plan or appointment
of itself or its nominee as trustee thereunder. The PBGC has not instituted or
threatened in writing a proceeding to terminate any Title IV Plan. All PBGC
premiums due on or before the Closing Date with respect to any Title IV Plan
have been paid in full, including late fees, interest, and penalties, if and to
the extent applicable. Copies of the actuarial report for the 1994 plan year and
an update thereto as of January 1, 1995 for each Title IV Plan and of a report
which accurately projects the funded status and contribution requirements for
each Title IV Plan as of the Closing Date have been delivered to Buyer. There
has been no material adverse change in the Assets, Liabilities or financial
position of any Title IV Plan since the date of the most recent actuarial
report. None of the Sellers' purposes of engaging in the transactions
contemplated hereby is for the evasion or avoidance of Liability under Title IV
of ERISA.
(vii) None of the Castle Subsidiaries nor any ERISA Affiliate
has ever contributed to or has ever been obligated to contribute to any
Multiemployer Plan.
(viii) There does not now exist, nor do any circumstances
exist that could result in, any Liability under (A) the continuation coverage
requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, (B)
Title IV of ERISA, Section 302 of ERISA, or Sections 412 and 4971 of the Code,
or (C) corresponding or similar provisions of foreign Laws that would be a
Liability of the Buyer following the Closing Date. Without limiting the
generality of the foregoing, neither Castle nor the Asset Sellers nor any of
their Affiliates have engaged in any transaction described in Section 4069,
4204, or 4212 of ERISA.
(ix) The Asset Sellers have no Liability for life, health,
medical, or other welfare benefits to former employees or beneficiaries or
dependents thereof, except for health continuation coverage as required by
Section 4980B of the Code or Part 6 of Title I of ERISA and such health
continuation coverage is at no expense to any Castle Subsidiary or ERISA
Affiliate.
(x) There are no pending actions, claims, litigations, or
arbitrations which have been asserted in writing or instituted (other than in
respect of benefits due in the ordinary course) against the Assets of any of the
Indian Benefit Plans or against the Asset Sellers or any fiduciary of the Indian
Benefit Plans.
(xi) The Liabilities for all benefits provided pursuant to
all Indian Benefit Plans have been fully and adequately provided for on the
books of account of the Asset Sellers in accordance with GAAP.
(xii) Following the Closing, Buyer will have no Liability of
any kind, actual, contingent, present, future or otherwise with respect to any
Benefit Plans (other than the Indian 401(k) Plan and the DB Plan) for which
Castle, any Asset Seller or any ERISA Affiliate or any of them could have any
Liability.
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Section 4.9 Financial Condition. Castle has delivered to Buyer (a) the
audited consolidated balance sheet as of September 30, 1994 (the "Balance Sheet
Date") of Castle and its Subsidiaries (the "Balance Sheet") and the audited
consolidated statement of income, consolidated statement of retained earnings,
and consolidated statement of cash flows of Castle and its Subsidiaries for the
year then ended, (b) the audited balance sheet as of the Balance Sheet Date of
IRLP and the audited statement of income, statement of retained earnings, and
statement of cash flows of IRLP for the year then ended, and (c) the unaudited
balance sheet as of August 31, 1995 of IRLP and the unaudited statement of
income, statement of retained earnings, and statement of cash flows of IRLP for
the period then ended. Each such balance sheet presents fairly the financial
condition, assets, liabilities, and stockholders' equity or partnership capital
of the respective entities as of its date; each such statement of income and
statement of retained earnings presents fairly the results of operations of the
respective entities for the period indicated; and each such statement of cash
flows presents fairly the information purported to be shown therein. To the
Knowledge of Sellers, the financial statements referred to in this Section 4.9
have been prepared in accordance with GAAP (except, in the case of the unaudited
statements, for the omission of footnote disclosures and other information and
for normal year-end adjustments) and the books and records of Castle and its
Subsidiaries. To the Knowledge of Sellers, the Castle Subsidiaries have no
material capital lease obligations (other than leases for copiers, vehicles. and
similar equipment which may have been capitalized) and no material long-term
liabilities for the deferred purchase price of any assets (other than a license
fee for the Penex process). As of the date hereof (with respect to clause (a)
only) and as of the Closing Date: (a) the Acquired Corporation has at least $3.5
million of cash plus interest accrued thereon in bank accounts specified in
Schedule 4.9 attached hereto, which cash and interest shall be part of the
Assets owned by IRC at Closing, and has no Liabilities, known or unknown,
accrued or unaccrued, aggregating more than $25,000, other than Environmental
Claims; and (b) IRLP has title to the "tank bottoms" specified on Schedule 2.2C
attached hereto.
Section 4.10 Taxes. (a) The Acquired Corporation is a member of an
affiliated group of corporations within the meaning of Section 1504 of the Code
(the "Consolidated Group"), and Castle is the common parent of the Consolidated
Group.
(b) The Acquired Corporation has joined in the filing of
consolidated Federal income Tax Returns by the Consolidated Group, and the
Acquired Corporation will continue to be included as a member of the
Consolidated Group for Federal income tax purposes up to and including the
Closing Date, including for purposes of filing the consolidated Federal income
Tax Return of the Consolidated Group for the tax year which includes the Closing
Date.
(c) The Consolidated Group has filed all Tax Returns that it
was required to file, and each of the Castle Subsidiaries and any combined,
consolidated, or unitary group of which any of the Castle Subsidiaries is or has
at any time been a member (any such group being a "Relevant Group") has filed
all Tax Returns that it was required to file prior to the Closing Date. All such
Tax Returns were correct and complete in all material respects. All Taxes shown
to be due on such Tax Returns have been paid. Neither the Consolidated Group,
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any Relevant Group, nor any of the Castle Subsidiaries is a party to any
agreement extending the time within which to file any Tax Return. No closing
agreement pursuant to Section 7121 of the Code or compromise pursuant to Section
7122 of the Code (or any predecessor provisions) or any similar provision of any
state or local law has been entered into by or with respect to the Acquired
Corporation. No claim has ever been made by any authority in a jurisdiction in
which any of the Castle Subsidiaries does not file Tax Returns that it is or may
be subject to taxation by that jurisdiction.
(d) Each of the Castle Subsidiaries has withheld and paid all
material Taxes required to be withheld and paid prior to the Closing Date.
(e) There is no dispute or claim concerning any material
liability for Taxes of any of the Castle Subsidiaries or any Relevant Group
currently pending.
(f) No Tax Returns of any of the Castle Subsidiaries or of
any Relevant Group or Consolidated Group for any taxable year beginning on or
after January 1, 1991 have been audited except as set forth on Schedule 4.10(f).
(g) None of the Castle Subsidiaries, any Relevant Group or
the Consolidated Group has waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to any Tax assessment or
deficiency.
(h) All Taxes attributable to periods or portions thereof
ending on or before the Closing Date for which any Castle Subsidiary is or may
be liable, whether by Contract, by reason of its status as a transferee or
member of the Consolidated Group or any Relevant Group or otherwise, have been
paid or an adequate reserve will have been established therefor as of December
31, 1995 in accordance with GAAP on the books of such Castle Subsidiary, and
each Castle Subsidiary has no Liability for Taxes in excess of the amounts so
paid or the reserves to be so established by it.
(i) The Acquired Corporation is not a "consenting
corporation" within the meaning of Section 341(f)(1) of the Code and none of the
assets of any Castle Entity is subject to any election under Section 341(f) of
the Code.
(j) The Acquired Corporation is not party to any tax sharing
agreement or arrangement that will survive or give rise to any liabilities or
obligations on the part of the Acquired Corporation or Buyer after the Closing
Date.
(k) None of the Castle Subsidiaries has made any material
payments, is obligated to make any material payments, or is a party to any
agreement that under certain circumstances could obligate it to make any
material payments that will not be deductible under Section 280G of the Code.
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(l) Following the Closing, none of the Purchased Assets and
none of the assets of the Acquired Corporation will be an asset or property that
the Buyer or the Acquired Corporation will be required to treat as being owned
by any other Person pursuant to the provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended and in effect immediately before the
enactment of the Tax Reform Act of 1986. None of the Purchased Assets or the
assets of the Acquired Corporation is (i) "tax-exempt use property" within the
meaning of Section 168(h)(1) of the Code, (ii) used predominantly outside the
United States within the meaning of Proposed Treasury Regulation Section
1.168-2(g)(5), or (iii) "tax-exempt bond financed property" within the meaning
of Section 168(g)(5) of the Code.
(m) The Acquired Subsidiary is not required to make any
adjustment under Section 481(a) of the Code or any comparable provision of
state, local or other Tax law by reason of any change in accounting method or
otherwise.
Section 4.11 Insurance. Listed on Schedule 2.2B are all insurance
policies relating to the Assets of the Acquired Corporation or the Asset
Sellers. Each such insurance policy is, as of the date of this Purchase
Agreement, in full force and effect and will be in effect on the Closing Date.
Section 4.12 No Broker. The Castle Entities have not engaged or
authorized any broker, investment banking firm, finder, agent, or other Person
to act on their behalf, directly or indirectly, as a broker or finder in
connection with the Transactions.
Section 4.13 Accuracy of Information. The Castle Entities have not
omitted to disclose to Buyer any material fact necessary in order for the
representations and warranties of Castle and the Castle Subsidiaries in this
Purchase Agreement and the other Seller Documents not to be misleading.
V. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Sellers as follows:
Section 5.1 Organization and Good Standing. Buyer is a corporation
duly organized, validly existing, and in good standing under the laws of its
state of organization. At the Closing Assignee, if any, will be a limited
partnership duly organized, validly existing and, to the extent applicable, in
good standing under the laws of its state of organization and will be duly
qualified in the State of Illinois (if other than its state of organization).
Section 5.2 Authorization; Enforceability. Buyer has the requisite
power and authority to enter into this Purchase Agreement, the Seller Note, the
Mortgage and the Escrow Agreement and the other documents to be executed and
delivered by Buyer in connection herewith (collectively, the "Buyer Documents"),
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and to consummate the Transactions. The execution and delivery of the Buyer
Documents and the consummation of the Transactions have been duly approved and
authorized by Buyer. The Buyer Documents and the Transactions have been duly
authorized by Buyer. This Purchase Agreement has been duly executed and
delivered by Buyer and at the Closing the other Buyer Documents will have been
duly executed and delivered by Buyer. Assuming this Purchase Agreement is and
the other Buyer Documents to which any Seller will be a party are the legal,
valid, and binding obligations of the Sellers, this Purchase Agreement
constitutes and such other Buyer Documents will constitute the legal, valid, and
binding obligations of Buyer, enforceable against Buyer in accordance with its
terms.
Section 5.3 Consents and Approvals. Listed on Schedule 5.3 are all of
the Required Filings and Approvals of Buyer in connection with the execution and
delivery of the Buyer Documents and the consummation of the Transactions. At the
Closing, all such Required Filings and Approvals of Buyer will be obtained,
except any listed on a schedule to be delivered by Buyer pursuant to Section
12.3(e).
Section 5.4 No Violation. The execution, delivery, and performance of
the Buyer Documents by Buyer and the consummation by it of the Transactions will
not (a) violate any provision of the certificate of incorporation of Buyer or
(b) violate, conflict with, result in a breach of any provision of, constitute a
default or an event which, with notice or lapse of time or both, would
constitute a default under, result in the termination of or accelerate the
performance required by, result in a right of termination or acceleration under,
or result in the creation of any Lien upon any of the assets of Buyer under any
of the terms of any Contract to which Buyer is a party before giving effect to
the Transactions to be consummated on the Closing Date.
Section 5.5 No Broker. Buyer has not engaged or authorized any broker,
investment banking firm, finder, agent, or other Person to act on its behalf,
directly or indirectly, as a broker or finder in connection with the
Transactions, other than Oppenheimer & Co. Sellers shall have no liability for
the fees payable to Oppenheimer & Co. by Buyer in connection with the
Transactions, which fees shall be paid by Buyer.
Section 5.6 Subsequent Sale. Buyer has no present intention to sell or
cause to be sold the Shares, the Assets of the Acquired Corporation or all or
substantially all of the Purchased Assets, and has received no offers or
proposals regarding any such sale. The Sellers recognize that after the Closing
circumstances may change and Buyer will deal with such Assets in its economic
self-interest as it sees fit under the circumstances, which could include a sale
of some or all such Assets.
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VI. TAX MATTERS
Section 6.1 Access to Information. (a) Castle will make available to
Buyer any information relating to the Acquired Corporation which has been
included in the consolidated Federal income Tax Returns filed by the
Consolidated Group for the taxable years up to and including the Closing Date
that is relevant for purposes of determining the tax liabilities and attributes
of the Acquired Corporation. Sellers will make available to Buyer such other
information concerning Taxes as may reasonably be requested by Buyer.
(b) Following the Closing, Buyer agrees to make available to
Castle any information relating to the Acquired Corporation (including, but not
limited to, its books and records and work papers for all periods in which the
Acquired Corporation has been included as a member in the Consolidated Group for
purposes of filing consolidated Federal income Tax Returns) that is relevant for
purposes of determining the tax liability of the Consolidated Group for all
periods up to and including the Closing Date, as is reasonably necessary for the
preparation of any Tax Return, and for purposes of dealing with any examination
by or controversy with the IRS or any other taxing authority.
Section 6.2 Tax Indemnification. Sellers shall jointly and severally
indemnify and hold the Buyer Indemnitees, including without limitation, the
Acquired Corporation, harmless from (a) any and all Liabilities for Taxes of any
Castle Subsidiary, the Consolidated Group, or any Relevant Group, and (b) any
and all Liabilities for Taxes for which any Castle Subsidiary, the Consolidated
Group, or any Relevant Group is liable as withholding agent or transferee, by
Contract, or otherwise, including in each case any related Damages; provided,
however, that, except in the case of Liability for Federal or state income taxes
of the Consolidated Group or any Relevant Group for the taxable year of the
Consolidated Group or such Relevant Group which includes the Closing Date, such
indemnity shall include only Taxes with respect to periods ending on or prior to
the Closing Date and the portion through and including the Closing Date of any
taxable period that includes, but does not end on, the Closing Date (determined
by means of a closing of the books and records of the Acquired Corporation as of
the close of business on the Closing Date).
Section 6.3 Transfer Taxes, Sellers, jointly and severally, and Buyer
shall each be responsible to pay 50% of any and all sales, use, value added,
excise and other transfer or similar Taxes imposed on the transfer of the
Purchased Assets and the Shares hereunder, including without limitation the
following Taxes relating to the transfer of the real property included in the
Purchased Assets: (a) the Illinois state transfer tax of $.50 per $500 paid for
real property located in Illinois, (b) the Lawrence County transfer tax of $.25
per $500 paid for real property located in Lawrence County, and (c) the Indiana
State Corporate Gross Income Tax of 1.2% of the consideration paid for real
property located in Indiana. Buyer shall execute and deliver to Sellers at the
Closing any certificates or other documents as Sellers may reasonably request to
comply with any reporting, notification, or filing requirements relating to, or
to perfect any exemption from, any transfer, documentary, sales, excise or use
tax, or other similar taxes.
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Section 6.4 Post-Closing Audits and Other Proceedings. (a) Castle and
Buyer agree to give prompt notice to each other of any proposed adjustment to
Taxes for periods ending on or prior to the Closing Date or any period within
which the Closing Date occurs. Castle and Buyer shall cooperate with each other
in the conduct of any audit or other proceeding involving the Acquired
Corporation for such periods and each may participate at its own expense;
provided that Castle shall have the right to control the conduct of any such
audit or proceeding for which Castle (i) agrees that any resulting Tax is
covered by the indemnity provided in Section 6.2 above and (ii) reasonably
demonstrates to Buyer its ability to make such indemnity payment.
Notwithstanding the foregoing, neither party may settle or otherwise resolve any
such claim, suit, or proceeding without the consent of the other party, such
consent not to be unreasonably withheld; provided, however, that Buyer shall not
be required to contest any proposed adjustment to, or claim for, any Tax if
Buyer waives its right to any indemnity in respect to such Tax hereunder. Buyer
shall promptly pay over to Castle any Tax refund received by any of the Acquired
Corporation (or by Buyer or any of its Affiliates with respect to any of the
Acquired Corporation) relating to any period ending on or prior to the Closing.
(b) Castle shall be responsible for the preparation and
filing of all state income and other Tax Returns for the Acquired Corporation
for short taxable periods ending on the Closing Date in states the tax laws of
which require Tax Returns for such short taxable periods.
Section 6.5 Certain Consolidated Return Matters. (a) Any tax sharing
agreement or arrangement between Castle and its Affiliates and the Acquired
Corporation shall be terminated as of the Closing Date, and shall have no
further effect for any taxable year.
(b) Castle shall include the income or loss of the Acquired
Corporation for periods through the Closing Date in the consolidated Federal
income Tax Return filed by the Consolidated Group for the period including the
Closing Date. Castle shall prepare books and working papers (including a closing
of the books) which will clearly demonstrate the income and activities of the
Acquired Corporation for the period ending on the Closing Date.
VII. COVENANTS OF SELLERS
The Sellers hereby jointly and severally covenant and agree with Buyer
as follows (all such covenants and agreements to survive the Closing unless
otherwise expressly stated):
Section 7.1 Access to Information. From and after the date of this
Purchase Agreement and until the Closing Date or the Termination Date, Buyer and
its authorized representatives shall upon reasonable notice have access during
normal business hours to (a) all properties, books, records, Contracts, and
documents of Sellers relating to any of the Castle Subsidiaries, including
without limitation all such consolidating financial statements and financial
statements of the Castle Subsidiaries as are prepared in the normal course of
the preparation of the audited financial statements described in Section 4.9,
and Sellers shall furnish or cause to be furnished to Buyer and its authorized
representatives information with respect to the affairs and business of the
Castle Subsidiaries as Buyer may reasonably request, and (b) counsel,
representatives, accountants and auditors of Castle and the Castle Subsidiaries.
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Section 7.2 Actions Prior to Closing Date. From and after the date of
this Purchase Agreement and until the Closing Date or Termination Date,
whichever first occurs:
(a) Sellers shall not undertake or institute any action of
the Castle Subsidiaries which could reasonably be expected to have a material
adverse effect on the assets, properties, financial condition, or operating
results of any of the Castle Subsidiaries.
(b) Sellers shall not (i) sell, pledge, convey, transfer,
lease or encumber any of the Shares or any partnership interests in the Asset
Sellers or the Purchased Assets, or (ii) sell or permit any Castle Subsidiary to
issue or sell any shares of capital stock or other equity interests of any
Castle Subsidiary or any securities convertible or exchangeable for, or options.
warrants, commitments, or rights of any kind to acquire, any such shares of
capital stock or other equity interests.
(c) Castle shall promptly notify Buyer of any material
lawsuits, claims, proceedings, or investigations of which Sellers have Knowledge
that may be threatened, brought, asserted, or commenced against or involving any
of the Castle Subsidiaries, the Purchased Assets, or the Transactions.
(d) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to: (i) make any loans or advances to any other
person or enter into any Contract relating to the borrowing of money or
extension of credit (including obligations with respect to capital leases); or
(ii) assume, guarantee, endorse, or otherwise become liable or responsible for
the obligations of any other person (whether directly, contingently, or
otherwise).
(e) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to: (i) increase or agree to increase the
compensation payable to any of the directors, officers, or employees of the
Castle Subsidiaries, except pursuant to the terms of agreements or plans as
currently in effect; or (ii) enter into or adopt any pension, profit-sharing,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation rights, or severance pay plan or any employment or consulting
agreement, with or for the benefit of any director, officer, or employee of the
Castle Subsidiaries, whether past or present, or amend or terminate any of such
plans or any of such agreements in existence on the date hereof.
(f) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to, enter into any Contracts which, individually
or in the aggregate, are material to the Castle Subsidiaries or modify, amend,
terminate, or cancel any existing material Contract.
(g) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to, declare, set aside, or pay to any such
stockholder any dividend or other distribution in respect of its capital stock.
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(h) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to, enter into or agree to enter into any
transaction with or for the benefit of any Affiliate.
(i) The Asset Sellers shall not, and the Sellers shall not
permit the Acquired Corporation to, make any change in any of its methods of
accounting or in any of its accounting principles or practices.
Section 7.3 Consents and Approvals. (a) The Sellers shall use their
commercially reasonable efforts to obtain the Required Filings and Approvals of
the Castle Entities.
(b) The Castle Entities shall, without directly incurring any
costs or expenses (other than fees and expenses of their counsel), cooperate in
good faith with Buyer in the obtaining by Buyer of the Required Filings and
Approvals of the Buyer.
Section 7.4 Confidentiality. The Sellers shall use their commercially
reasonable efforts to insure that all confidential information which the
Sellers, the Acquired Corporation, or any of their respective officers,
directors, employees, counsel, agents, investment bankers, or accountants may
now possess or may hereafter create or obtain relating to the financial
condition, results of operations, business, properties, Assets, Liabilities, or
future prospects of any Castle Subsidiary or Buyer or any customer or supplier
of any of them shall not be published, disclosed, or made accessible by any of
them to any other Person at any time or used by any of them except pending the
Closing in the business and for the benefit of the Castle Entities, in each case
without the prior written consent of Buyer; provided, however, that the
restrictions of this sentence shall not apply (a) after this Purchase Agreement
is terminated, but only to the extent such confidential information relates to
the financial condition, results of operations, business, properties, Assets,
Liabilities or future prospects of any Castle Subsidiary, of any Affiliate of
any of them, or any customer or supplier of any of them, (b) to disclosure to
existing or prospective lenders (including lenders to IOC) or other investors
and their legal advisors or to others whose consent may be required or desirable
in connection with obtaining the consents which are required or desirable to
consummate the Transactions, (c) as may otherwise be required by law, (d) as may
be necessary or appropriate in connection with the enforcement of this Purchase
Agreement, (e) to the extent such information shall have otherwise become
publicly available not in violation of the provisions of this Purchase
Agreement, or (f) as may otherwise be permitted by Section 13.2(b).
Section 7.5 Insurance. The Sellers shall maintain in effect insurance
covering the Castle Subsidiaries and the Purchased Assets, of the types and in
the amounts in effect at the date of this Purchase Agreement. As of the Closing,
Sellers shall take all steps necessary to cause the transfer to Buyer of (a) the
insurance policies identified on Schedule 2.2B hereto as being transferred to
Buyer, and (b) all claims which have been or may hereafter be made with respect
to any insurance policies now or previously in effect at any time where such
claims relate (in whole or in part) to the Refinery, the Terminal, the Purchased
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Assets and/or the Assumed Liabilities, including, without limitation, the claims
for insurance recovery Assets and/or the Assumed for the cooling tower at the
Refinery damaged in September, 1995 (the "Cooling Tower Claim"); provided that
Sellers shall make appropriate arrangements (including through the issuance of
separate insurance policies) with their insurers, satisfactory to IOC, to insure
that insurance costs and proceeds under said insurance policies which pertain to
IOC's inventory located at the Refinery are allocated and made payable to IOC or
its lenders or their agent, as the case may be.
Section 7.6 Names. After the Closing, upon Buyer's request, the
Sellers shall promptly change the name of each Asset Seller and its Affiliates
to a name which does not include the word "Indian" or derivatives thereof,
provided that Buyer reimburses Sellers for the reasonable legal costs and
disbursements incurred by Seller to effect any such name changes and any related
filings, if necessary, under the Uniform Commercial Code, and provided further
that such costs have been pre-approved in writing by Buyer. Effective upon the
earlier of (a) the sale of IOC's inventory located at the Refinery and the
Terminal or (b) the name changes above referred to, the Sellers will cease the
use of the name "Indian" or derivatives thereof in connection with the business
of the Sellers and their Affiliates.
Section 7.7 Transfer of Retirement Plans. (a) As of the Closing Date,
the Asset Sellers shall take all steps necessary to cause the transfer to the
Buyer of (i) all of each Asset Seller's right, title, and interest in and to the
Indian 401(k) Plan and Trust, including all Liabilities and account balances
thereunder and (ii) all of each Asset Seller's right, title, and interest in and
to the DB Plan and Trust and to substitute Buyer as the successor plan sponsor
under both the Indian 401(k) Plan and Trust and the DB Plan and Trust. Moreover,
if Buyer so elects following the Closing Date, Persons designated by Buyer shall
be appointed to serve as successor trustees of the Indian 401(k) Plan and Trust
and the DB Plan and Trust. Absent the appointment by Buyer of successor
trustees, the Asset Sellers shall have secured the consent of the present
trustees of the Indian 401(k) Plan and Trust and of the DB Plan and Trust to
continue to serve in that capacity for up to one year after the date hereof. The
Asset Sellers and Buyer agree to execute after the Closing Date any additional
documents necessary, in the reasonable judgment of the other, to effectuate the
transfer of the Indian 401(k) Plan, the DB Plan, and their related Trusts to
Buyer.
(b) As soon as practicable after the Closing Date, the Asset
Sellers shall deliver to Buyer such copies of the Asset Sellers' applicable
records concerning the participants in the Indian 401(k) Plan and the DB Plan
and such copies of other applicable records of Asset Sellers regarding the
Indian 401(k) Plan and DB Plan as Buyer may reasonably require and request.
(c) The Asset Sellers represent that an application for a
favorable Determination Letter on the qualification of the Indian 401(k) Plan
and the DB Plan under Section 401(a) of the Code has been submitted to the IRS
prior to the expiration of the extension of the remedial amendment period
provided in IRS Advance Announcement 94-136.
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(d) Effective prior to or as of the Closing Date, Castle
shall adopt a new Section 401(k) plan (the "Castle Plan") for the benefit of
Castle's employees designated by Castle (the "Castle Employees"). The Castle
Plan shall contain a provision authorizing the receipt of assets transferred
from another qualified plan. As soon as practicable following the Closing Date,
Castle shall submit an application to the IRS for a determination that the
Castle Plan is a qualified pension or profit sharing plan within the meaning of
Sections 401(a) and 401(k) of the Code and shall make any and all changes which
may be necessary to obtain a favorable determination from the IRS as to the
qualified status of the Castle Plan. Upon the receipt of a favorable
Determination Letter as to the qualified status of the Castle Plan, Castle shall
furnish Buyer with a copy of such favorable Determination Letter.
Section 7.8 DB Plan Funding. On or before the Closing Date, the Asset
Sellers shall cause to be paid to the DB Plan the amount, if any, which the
current enrolled actuary for the DB Plan has determined is required in order to
satisfy the minimum funding requirement of Code Section 412 for the plan year of
the DB Plan ending on December 31, 1994 and for the period commencing January 1,
1995 and ending on the Closing Date, as if Code Section 412 required all minimum
funding contributions with respect to such period to be made on or prior to the
Closing Date.
Section 7.9 Intercompany Indebtedness. On or prior to the Closing
Date, Castle shall contribute to capital or execute and deliver to the Acquired
Corporation a release and discharge of all Liabilities of the Acquired
Corporation to Castle or any Affiliate of Castle existing prior to the Closing,
other than under the Compliance Cost Agreement, and the Acquired Corporation
shall execute and deliver to the Sellers a release and discharge or shall
declare and pay a dividend of all Liabilities of the Sellers and their
Affiliates to the Acquired Corporation existing prior to the Closing, except any
Liabilities arising under this Purchase Agreement and the Transactions.
Section 7.10 Commercially Reasonable Efforts; Cooperation. The Sellers
agree to use all commercially reasonable efforts to cause the conditions set
forth in Articles IX and X to be satisfied, and to take, or cause to be taken,
all action and to do, or cause to be done, and to assist and cooperate fully
with the other parties in doing, all things necessary, proper, or advisable to
consummate the Transactions, provided that nothing in this Section 7.10 shall
obligate Castle to contribute any capital to the Asset Sellers as a condition to
the Closing, other than as contemplated by Section 7.9.
Section 7.11 Use of Asset Purchase Price; Payment of Creditors.
(a) At the Closing, (i) $500,000 of the cash portion of the Asset
Purchase Price shall be paid by IRLP to IOC or its designees as part of the
consideration for (A) its consent to the release, and its release at the
Closing, of all of the Liens held by it on IRLP's Assets (including the release
of all such Liens that were previously assigned to third parties by IOC) and (B)
the transfer of the tank bottoms identified in Schedule 2.2C hereto and (ii) the
balance of the Asset Purchase Price (other than the $225,000 contingent payment
referred to in Section 3.1(b)) shall be delivered to the escrow agent under
the Escrow Agreement to be held and disbursed as contemplated thereby.
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(b) If at any time after the date of execution of this Agreement and
prior to the Closing, (i) an Intervening Lien shall be placed on any of the
Purchased Assets or (ii) IRLP shall become aware of any Liabilities (other than
Assumed Liabilities) in respect of trade payables which are not identified in
Schedule 1.1C, and such Lien shall not have been released or such Liability
shall not have been discharged, then (A) the principal amount of the Seller Note
shall be reduced by the aggregate amount of the claims underlying all such
Intervening Liens and of all such other unidentified Liabilities in respect of
trade payables and (B) the amount by which the Seller Note is so reduced shall
be provided by Buyer and shall be used to pay such claims and Liabilities at
Closing.
Section 7.12 Escrow Agreement. The representations, warranties and
covenants of the parties set forth in the Escrow Agreement are incorporated
herein by this reference as if fully set forth herein.
Section 7.13 Use of Radnor Space. For a period beginning on the
Closing Date and ending on April 30, 1996, (a) Castle shall continuously allow
Buyer to use office and conference space and related equipment (including,
without limitation, telephones, facsimile machines, copiers, etc.),
receptionist, secretarial support and the like at Castle's Radnor, Pennsylvania
office, to the same extent that IRLP made use of the same over the two-year
period ending as of the date hereof and (b) Buyer shall continuously allow IRLP
to use a similar amount of space and similar services at the Refinery. All such
use shall be at no cost or charge to Buyer or IRLP, as applicable, except that
Buyer shall reimburse Castle, and Castle shall reimburse Buyer, for Castle's or
Buyer's out-of-pocket expense costs (but not any equipment or personnel costs)
for Buyer's or IRLP's, as applicable, use of the telephones, facsimile machines
and copiers.
Section 7.14 Reimbursement for Inventory Liquidation. From and after
the Closing, Sellers shall jointly and severally pay and reimburse Buyer, on
demand upon presentation of standard and appropriate substantiating
documentation, for any and all out-of-pocket costs and expenses (not including
internal personnel costs but including costs of personnel hired solely to
perform such services) incurred by Buyer with respect to any delivery, refining,
processing, movement, storage, administration, selling, liquidating, financing
or other action or transaction relating to any inventories of any Sellers or any
of their Affiliates. Such costs and expenses shall not include any fees or
profits to Buyer but shall include, without limitation, operating costs of
processing, refining, storage and/or delivery units and/or other equipment
(other than depreciation), taxes and personnel. Sellers jointly and severally
covenant and agree that all such inventories shall be removed from the Refinery
and the Terminal on or prior to January 31, 1996.
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VIII. COVENANTS OF BUYER
Buyer covenants and agrees with Sellers as follows (all such covenants
and agreements to survive the Closing unless otherwise expressly stated or, to
take effect after the Closing Date in the case of Section 8.1(c)(ii) below):
Section 8.1 Consents and Approvals. (a) Buyer shall use its
commercially reasonable efforts to obtain the Required Filings and Approvals of
Buyer.
(b) Buyer shall, without incurring any costs or expenses
(other than fees and expenses of Buyer's counsel), cooperate in good faith with
the Castle Entities in the obtaining by the Castle Entities of the Required
Filings and Approvals of the Castle Entities.
(c) Buyer shall use commercially reasonable efforts to
obtain, as promptly as practicable after the Closing, the Second Stage Financing
on terms and conditions acceptable to Buyer.
Section 8.2 Confidentiality. Buyer shall use its commercially
reasonable efforts to insure that all confidential information which Buyer, its
Affiliates, or any of their respective officers, directors, employees, counsel,
agents, investment bankers, or accountants may now possess or may hereafter
create or obtain relating to the financial condition, results of operations,
business, properties, Assets, Liabilities or future prospects of any Castle
Subsidiary or any customer or supplier of any of them shall not be published,
disclosed, or made accessible by any of them to any other Person at any time or
used by any of them except pending the Closing in the business and for the
benefit of the Castle Entities, in each case without the prior written consent
of Castle; provided, however, that the restrictions of this sentence shall not
apply (a) after the Closing, (b) to disclosure to existing or prospective
lenders or other investors (and their advisors) or to others whose consent may
be required or desirable in connection with obtaining the financing or consents
which are required or desirable to consummate the Transactions, (c) as may
otherwise be required by law, (d) as may be necessary or appropriate in
connection with the enforcement of this Purchase Agreement, or (e) to the extent
such information shall have otherwise become publicly available not in violation
of the provisions of this Purchase Agreement.
Section 8.3 Transfer of Retirement Plans. (a) Buyer agrees to adopt
the Indian 401(k) Plan and Trust, including all amendments thereto, on the
Closing Date as the Indian 401(k) Plan and Trust exist immediately prior to such
date and agrees to assume all rights, duties and obligations thereunder.
Notwithstanding anything herein contained to the contrary, Buyer shall retain
the right to amend or to terminate the Indian 401(k) Plan and Trust (as adopted
and assumed by Buyer) at any time after the Closing Date, in accordance with
applicable law.
(b) Buyer agrees to adopt the DB Plan and Trust, including
all amendments thereto, on the Closing Date, as the DB Plan and Trust exist
immediately prior to such date and agrees to assume all rights, duties, and
obligations thereunder, including, without limitation, the Liability for all
"unfunded current liability" (as defined under Section 412 of the Code) as well
as all minimum funding requirements for periods commencing on the Closing Date.
Notwithstanding anything herein contained to the contrary, Buyer shall retain
the right to amend and to terminate the DB Plan and Trust (as adopted and
assumed by Buyer) at any time after the Closing Date, in accordance with
applicable law.
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(c) Buyer shall be responsible for satisfying any and all
governmental reporting and disclosure requirements applicable to the Indian
401(k) Plan and the DB Plan with respect to plan years ending on and after
December 31, 1995. Castle and the Asset Sellers shall furnish promptly to Buyer
any information or data related to periods prior to the Closing Date which may
be necessary to Buyer in order to satisfy such governmental reporting and
disclosure requirements in a timely manner.
(d) When Castle has received a favorable IRS Determination
Letter with respect to the Castle Plan, Buyer shall cause the entire account
balance of each of the Castle Employees in the Indian 401(k) Plan to be
transferred to the trustee of the Castle Plan and to be credited to that Castle
Employee's account under the Castle Plan. In connection with such transfer,
Buyer shall provide to Castle a statement from the plan administrator that the
Buyer's 401(k) Plan either has or will apply for a favorable IRS determination
letter, and Castle and Buyer shall execute all documents and make all filings
necessary or appropriate in order to satisfy the requirements of applicable Law.
Section 8.4 Reimbursement for Real Estate Taxes. Buyer agrees to pay
to the appropriate tax authorities when due the dollar amount specified in
Schedule 8.4 for the periods specified in said Schedule, representing 50% of the
real estate taxes respecting the Refinery and the Terminal identified in
Schedule 8.4 for the periods specified in said Schedule, provided that the
making of such payment shall be subject to the condition precedent that 50% of
all such taxes shall have been paid in full (together with any interest and
penalties) by the Castle Entities and any and all Liens (or possible future
Liens) relating thereto shall have been released, and subject to presentation by
Sellers to Buyer of appropriate substantiating documentation.
Section 8.5 Assistance with Inventory Liquidation. Subject to
fulfillment of the ongoing reimbursement obligations set forth in Section 7.14
above, for the period commencing on the Closing Date and ending on January 31,
1996, Buyer shall, to the extent reasonably practicable and specifically
requested in writing by Sellers or IOC from time to time, and without any
requirement to incur any material incremental Liability (or lose any material
opportunity) of any kind or nature whatsoever, utilize the Refinery and the
Terminal to assist IOC in the liquidation of any inventory which IOC may own
immediately following the Closing (including the storage, consolidation and
transmission of feedstocks previously delivered to IOC at the Refinery and
products previously refined by IRLP for IOC at the Refinery). Sellers and IOC
hereby jointly and severally waive, release and discharge Buyer and all Buyer
Indemnitees from any and all Liabilities, claims and causes of action relating
to any actions (or omissions) of Buyer or any Buyer Indemnitees with respect to
such inventory liquidation (except for Liabilities directly caused by the gross
negligence or wilful misconduct of Buyer). Subject to IOC's agreement to be
bound by the provisions of the preceding sentence, and of the last sentence of
Section 7.14, IOC shall be a third party beneficiary of the provisions of this
Section 8.5.
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Section 8.6 Insurance Reimbursements and Payments. Buyer shall
promptly reimburse and pay IRLP for (a) the allocable premium cost (relating to
periods beginning on the Closing Date) for any insurance policies identified on
Schedule 4.11 attached hereto and transferred to Buyer pursuant to Section 7.5
above, and (b) 50% of the gross insurance proceeds paid to (or at the direction
of) Buyer by the applicable insurance company for the Cooling Tower Claim (up to
a maximum of $350,000).
Section 8.7 Employee Matters. Buyer shall reimburse IRLP on or prior
to December 15, 1995, for the aggregate gross salary payments and applicable
payroll taxes and benefits made by IRLP with respect to the period from the
Closing Date through November 30, 1995 to those of its employees identified in
Schedule 8.7, Part 1 attached hereto who become employees of Buyer as of the
Closing Date as set forth in said Schedule 8.7, Part 1, subject to such changes
to said Schedule 8.7, Part 1 as may be made pursuant to a written notice from
Buyer to IRLP at the Closing. Further, except for the senior management
personnel identified on Schedule 8.7, Part 2, for a period of 18 months
following the Closing Date, Buyer agrees not to hire or retain (as an employee,
consultant or otherwise) any employee of IRLP as of the date hereof who is
identified on Schedule 8.7, Part 3, who does not waive any right to severance or
other similar payments from Castle or any of its Affiliates for any period after
November 30, 1995.
Section 8.8 Commercially Reasonable Efforts; Cooperation. Buyer agrees
to use all commercially reasonable efforts to cause the conditions set forth in
Articles IX and X to be satisfied, and to take, or cause to be taken, all action
and to do, or cause to be done, and to assist and cooperate fully with the other
parties in doing, all things necessary, proper or advisable to consummate the
Transactions.
IX. CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to purchase the Shares and Purchased Assets
at the Closing are subject to the fulfillment at or prior to the Closing of each
of the following conditions, unless waived in writing by Buyer.
Section 9.1 Truth of Representations and Warranties. The
representations and warranties made by the Sellers in this Purchase Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
or given on and as of such date.
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Section 9.2 Compliance with Covenants. The Sellers shall have
performed and complied in all material respects with all of their covenants and
obligations under this Purchase Agreement which are to be performed or complied
with by them prior to or at the Closing.
Section 9.3 Absence of Suit. No action, suit, proceeding, or
investigation shall have been commenced or threatened by any Person against
Buyer, the Sellers, the Purchased Assets or any of their officers, directors or
Affiliates seeking to modify in any material respect, or to restrain or prevent,
and no Law shall have been enacted, issued, or promulgated which has the effect
of modifying in any material respect or restraining or preventing, the
Transactions or questioning the validity or legality of the Transactions.
Section 9.4 Receipt of Consents and Approvals. All Required Filings
and Approvals indicated on Schedules 4.3, 4.4, or 5.3 as material Required
Filings and approvals shall have been obtained.
Section 9.5 Proceedings and Instruments Satisfactory, Certificates.
All proceedings, corporate or otherwise, to be taken by the Sellers in
connection with the Transactions shall have occurred and all certificates and
other documents reasonably incident thereto as Buyer may reasonably request
shall have been delivered to Buyer.
Section 9.6 Intercompany Indebtedness. Castle shall have contributed
to capital or executed and delivered to the Acquired Corporation a release and
discharge of all Liabilities of the Acquired Corporation to Castle or any
Affiliate of Castle existing prior to the Closing, except any Liabilities
arising under this Purchase Agreement or under the Compliance Cost Agreement.
Section 9.7 Deliveries at Closing. All documents and instruments
required to be delivered by the Sellers and their Affiliates at the Closing
shall have been delivered to Buyer as provided in Section 12.2.
Section 9.8 No Material Adverse Change. From date hereof through the
Closing Date, there shall not have occurred (a) any material adverse change in
the financial condition, operating results, Assets, properties, or business of
any of the Castle Subsidiaries from that shown in the financial statements
delivered pursuant to Section 4.9, other than any such material adverse change
resulting from the shut-down of the Refinery on September 30, 1995 or from any
acts of Buyer or its Affiliates, or (b) any material adverse change in the Shell
Contract or any amendment, modification or termination of the Shell Contract,
whether or not agreed to by any of the Sellers.
Section 9.9 Bank Consents. All lenders to Castle and its Affiliates
who have any direct or indirect Liens on or other interest or Contract right in
or relating to the Purchased Assets (including, without limitation, BT
Commercial Corporation and Mees Pierson N.V.) shall have (i) consented to the
Transactions, and the transactions contemplated by the Platinum Sale Documents,
to the full extent necessary to permit consummation of the Transactions, and the
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transactions contemplated by the Platinum Sale Documents, without violation of
any such lender's rights, including, but not limited to, the terms of this
Purchase Agreement and the Escrow Agreement and (ii) released all such Liens,
interests and rights, all as acceptable to Buyer in its sole discretion
(collectively, the "Bank Consents").
Section 9.10 Mobil Consent. Mobil Oil Corporation ("Mobil") shall have
agreed and consented in writing to (a) an assignment to Buyer of all of IRLP's
rights under that certain Exchange Agreement dated as of July 29, 1994 between
Mobil and IRLP (as amended, the "Mobil Contract"), and (b) a modification of the
Mobil Contract, acceptable to Buyer in its sole discretion, limiting Buyer's
Liabilities under the Mobil Contract to an amount acceptable to Buyer and
extending the timing of payment of any such Liabilities in a manner acceptable
to Buyer.
Section 9.11 Platinum Sale Documents. The Platinum Sale Documents
shall be duly executed and delivered by IOC to Buyer and the transactions
contemplated thereby shall be consummated concurrently with the Transactions.
X. CONDITIONS TO OBLIGATIONS OF THE SELLERS
The obligations of the Sellers to be performed hereunder shall be
subject to the satisfaction prior to or at the Closing of the following
conditions unless waived in writing by Castle.
Section 10.1 Truth of Representations and Warranties. The
representations and warranties of Buyer in this Purchase Agreement shall be true
and correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made or given on
and as of such date.
Section 10.2 Compliance with Covenants. Buyer shall have performed and
complied in all material respects with all of its covenants and obligations
under this Purchase Agreement which are to be performed or complied with by it
prior to or at the Closing.
Section 10.3 Absence of Suit. No action, suit, proceeding, or
investigation shall have been commenced or threatened by any Person against
Buyer, the Sellers, or any of their officers, directors or Affiliates seeking to
modify in any material respect, or to restrain or prevent, and no Law shall have
been enacted, issued, or promulgated which has the effect of modifying in any
material respect or of restraining or preventing, the Transactions or
questioning the validity or legality of the Transactions.
Section 10.4 Receipt of Consents and Approvals. All Required Filings
and Approvals indicated on Schedules 4.3, 4.4, or 5.3 as material Required
Filings and Approvals shall have been obtained.
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Section 10.5 Proceedings and Instruments Satisfactory; Certificates.
All proceedings, corporate or otherwise, to be taken by Buyer in connection with
the Transactions shall have occurred and all certificates and other documents
reasonably incident thereto as the Sellers may reasonably request shall have
been delivered to the Sellers.
Section 10.6 Intercompany Indebtedness. The Acquired Corporation shall
have executed and delivered to the Sellers a release and discharge of all
Liabilities of the Sellers and their Affiliates to the Acquired Corporation
existing prior to the Closing, except any Liabilities arising under this
Purchase Agreement.
Section 10.7 Equity Contributions and Undertaking. Buyer shall have
received $5 million cash in equity contributions and Seller shall have received
from Gadgil Western Corporation ("GWC") an undertaking duly executed by GWC, in
the form previously agreed upon by Castle and GWC.
Section 10.8 Deliveries at Closing. All documents and instruments
required to be delivered by Buyer and its Affiliates at the Closing shall have
been delivered to the Sellers as provided in Section 12.3.
Section 10.9 Platinum Sale Documents. The Platinum Sale Documents
shall be duly executed and delivered by Buyer to IOC and the transactions
contemplated thereby shall be consummated concurrently with the Transactions.
Section 10.10 Bank Consents. The Bank Consents shall have been
obtained, in form and substance acceptable to Sellers in their sole discretion.
Section 10.11 Mobil Consent. Mobil shall have agreed and consented to
in writing to the Mobil assignment contemplated by Section 9.10(a) on terms
acceptable to IRLP in its sole discretion.
XI. INDEMNIFICATION
Section 11.1 Requirement of Indemnification. (a) Sellers shall jointly
and severally indemnify and hold the Buyer Indemnitees harmless from and against
any Damages suffered by them resulting from, arising out of, or incurred with
respect to, or (in the case of claims asserted against any Buyer Indemnitee by a
third party) alleged to result from, arise out of, or have been incurred with
respect to (i) the falsity, breach, or inaccuracy of any representation,
warranty, covenant, or agreement of the Sellers contained in this Purchase
Agreement or in any schedule, exhibit, document, or instrument delivered in
connection herewith, (ii) any current or future Liability whatsoever relating to
tax obligations of the Castle Entities, except as provided in Section 8.4 and
except for Liabilities for Taxes of the Acquired Corporation for periods
commencing on the Closing Date, (iii) any Liability whatsoever of the Sellers
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other than the Assumed Liabilities, whether arising prior to, on, or after the
Closing Date, whether or not known at the date hereof or on the Closing Date,
and whether or not identified in a Schedule to this Purchase Agreement, provided
that Castle shall not be liable for any such Liability to trade creditors of
IRLP for which it was not liable prior to the Closing, (iv) any Liability of the
Asset Sellers or any ERISA Affiliate related to any Indian Benefit Plan that
existed prior to or at Closing, maintained by, contributed to, or obligated to
be contributed to, at any time, by the Asset Sellers or any ERISA Affiliate
(other than the Indian 401(k) Plan and the DB Plan), and any Liability of the
Asset Sellers or any ERISA Affiliate related to any Title IV Plan or other
Benefit Plan other than the DB Plan and Trust, (v) any Liability of the Castle
Entities under any federal or state securities or similar laws, rules or
regulations with respect to any transactions, facts or circumstances (real or
alleged) occurring or existing prior to the Closing Date, (vi) any Liability
with respect to intracompany claims among the Castle Entities, except under the
Compliance Cost Agreement, (vii) any Liability relating to employment and/or
severance agreements, the WARN Act or any similar laws, rules or regulations,
options, stock appreciation rights and similar arrangements and/or rights
between any of the Castle Entities or any of their Affiliates and their
respective personnel, except as provided in Section 8.7, (viii) any Liability or
Damage of any party resulting from the failure of the Asset Sellers to use the
Asset Purchase Price in the manner set forth in the Escrow Agreement, (ix) any
Liability to BT Securities Corporation, its Affiliates, counsel,
representatives, consultants, employees or agents relating to previous "high
yield" or other financing and/or equity transactions with respect to the
Refinery, and (x) any Liability of Buyer or any Buyer Indemnitee resulting from
the use of the Refinery or the Terminal pursuant to Section 8.5 above except a
Liability referred to in this clause (x) directly caused by the gross negligence
or wilful misconduct of Buyer).
(b) Buyer shall indemnify and hold the Seller Indemnitees
harmless from and against any Damages suffered by them resulting from, arising
out of, or incurred with respect to, or (in the case of claims asserted against
any Seller Indemnitee by a third party) alleged to result from, arise out of, or
have been incurred with respect to (i) the falsity, breach, or inaccuracy of any
representation, warranty, covenant, or agreement of Buyer contained in this
Purchase Agreement or in any schedule, exhibit, document, or instrument
delivered in connection herewith, (ii) the Assumed Liabilities, (iii) any
Environmental Claims and (iv) any Liability of Buyer relating to tax obligations
of the Acquired Corporation for periods on and after the Closing Date.
Section 11.2 Procedures Relating to Indemnification. (a) A party (the
"indemnified party") seeking indemnification under this Purchase Agreement in
respect of, arising out of, or involving a claim or demand made by any Person
against the indemnified party (a "Third Party Claim") shall notify the
indemnifying party in writing of the Third Party Claim within 20 days after
receipt by the indemnified party of written notice of the Third Party Claim;
provided, however, that failure to give such notification shall not affect the
indemnification provided under this Purchase Agreement, except to the extent the
indemnifying party shall actually have been prejudiced by the failure.
Thereafter, the indemnified party shall deliver to the indemnifying party,
promptly after the indemnified party's receipt thereof, copies of all notices
and documents (including court papers) received by the indemnified party
relating to the Third Party Claim.
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(b) The indemnifying party shall have the right, within 30
days after being so notified, to assume the defense of such Third Party Claim
with counsel reasonably satisfactory to the indemnified party. In any such
proceeding the defense of which the indemnifying party shall have so assumed,
the indemnified party shall have the right to participate therein and retain its
own counsel at its own expense unless (i) the indemnified party and the
indemnifying party shall have mutually agreed to the retention of such counsel,
(ii) the indemnified party shall have received a written opinion of counsel to
the effect that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party,
or (iii) the named parties to any such proceeding (including the impleaded
parties) include both the indemnifying party and the indemnified party, and
representation of both parties by the same counsel would be inappropriate in the
opinion of the indemnified party's counsel due to actual or potential differing
interests between them; in any such case, such separate counsel may be retained
by the indemnified party at the indemnifying party's expense (provided that the
indemnifying party shall not be required to bear the fees and expenses of more
than one counsel (plus any local counsel as may be reasonably required) for each
group of similarly situated persons). To the extent that the settlement of such
a Third Party Claim, the defense of which has been assumed by the indemnifying
party, involves the payment of money only, the indemnifying party shall have the
right, in consultation with the indemnified party, to settle those aspects
dealing only with the payment of money, provided that the indemnifying party
pays such money and such settlement includes a general release from the other
parties to such Third Party Claim in favor of the indemnified party. In
connection with any such defense or settlement, the indemnifying party shall not
enter into a consent decree involving injunctive or non-monetary relief or
consent to an injunction without the indemnified party's prior written consent.
(c) With respect to all Third Party Claims, the indemnified
party shall cooperate in all reasonable respects with the indemnifying party in
connection with such claims and the defense or compromise of the claims. Such
cooperation shall include the retention and (upon the indemnifying party's
request) the provision to the indemnifying party of records and information
reasonably relevant to the Third Party Claim, making employees available on a
mutually convenient basis to provide additional information, and explanation of
any material provided under this Purchase Agreement. If the indemnifying party
shall have assumed the defense of a Third Party Claim, the indemnified party
shall not, without first waiving the indemnity as to such claim, admit any
liability with respect to, or settle, compromise, or discharge, the Third Party
Claim, without the indemnifying party's prior written consent.
(d) The foregoing provisions of this Section 11.2 shall not
apply to matters covered by the provisions of Article VI to the extent that the
provisions of this Section 11.2 are inconsistent with the provisions of Article
VI.
Section 11.3 Defense of Third-Party Claim. The failure by the
indemnifying party to notify the indemnified party of its election to defend any
Third Party Claim within 30 days after written notice thereof shall have been
given to the indemnifying party shall be deemed a waiver by the indemnifying
party of its right to defend such Third Party Claim. If the indemnifying party
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shall not assume the defense of any such Third Party Claim, the indemnified
party may defend against and, subject to obtaining the consent of the
indemnifying party, which shall not be unreasonably delayed or denied, settle
such Third Party Claim in such manner as it may deem appropriate.
Section 11.4 Payment. The indemnifying party shall pay directly all
Damages or shall, if the indemnified party elects to pay any Damages directly,
promptly reimburse the indemnified party for any Damages paid by the indemnified
party that is the subject of an indemnification given under this Article XI. The
indemnifying party shall reimburse the indemnified party promptly upon demand
for the amount of any judgment rendered or settlement entered into with respect
to any Third Party Claim, the defense of which was not assumed by the
indemnifying party, and, promptly upon demand, for all Damages paid by the
indemnified party in connection with the defense against such Third Party Claim.
Section 11.5 Limitation on Indemnification. (a) An indemnified party
shall not be entitled to assert later than September 30, 1997 any right of
indemnification for any Damages suffered by it as a result of the falsity,
inaccuracy, or breach of any representation or warranty (but not the breach of
any covenant or agreement) by the indemnifying party set forth herein; provided
however, that (i) any claim with respect to the falsity, inaccuracy, or breach
of a representation or warranty with respect to (A) title to Assets may be
brought at any time or (B) Taxes may be brought at any time prior to 30 days
after the expiration of the applicable statute of limitations and (ii) if there
shall then be pending any claim for such indemnification hereunder which has
been asserted prior to the applicable date by the indemnified party with
reasonable specificity, the indemnified party shall continue to have the right
to be indemnified with respect thereto.
(b) A Buyer Indemnitee shall not be entitled to
indemnification hereunder for any Damages suffered by it as a result of the
falsity, inaccuracy, or breach of any representation or warranty by the Sellers
unless the aggregate amount of Damages suffered by all Buyer Indemnitees for all
such falsities, inaccuracies, and breaches exceeds $25,000, and then the Sellers
shall be responsible only for the amount of such Damages that exceeds $25,000.
(c) A Seller Indemnitee shall not be entitled to
indemnification hereunder for any Damages suffered by it as a result of the
falsity, inaccuracy, or breach of any representation or warranty by Buyer unless
the aggregate amount of Damages suffered by all Seller Indemnitees for all such
falsities, inaccuracies, and breaches exceeds $25,000, and then Buyer shall be
responsible only for the amount of such Damages that exceeds $25,000.
(d) The aggregate amount to which an indemnified party shall
be entitled to receive as indemnification under this Article XI shall be reduced
by the amount of all tax benefits or savings actually available to and utilized
by such party as a result of any loss, liability, cost, expense, or damage
giving rise to such indemnification.
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(e) Except as provided in Articles III, VI, and XIII, each of
the parties acknowledges and agrees that, from and after the date of this
Purchase Agreement, its sole and exclusive remedy with respect to any and all
claims relating to the subject matter of this Purchase Agreement shall be
pursuant to the indemnification provisions in this Article XI.
XII. CLOSING
Section 12.1 Time and Place. The closing of the Transactions (the
"Closing") shall take place at the offices of Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York, as promptly as practicable after the
satisfaction or waiver of the conditions set forth herein, or at such other date
and place as may be agreed upon by the parties (the "Closing Date").
Section 12.2 Items to be Delivered by the Sellers. At the Closing, the
Sellers shall deliver in accordance with this Purchase Agreement, among other
things, the following:
(a) Certificates representing the Shares, duly endorsed in
blank or accompanied by appropriate stock powers for transfer of all right,
title, and interest in the Shares to Buyer.
(b) Such bills of sale and other instruments of transfer as
are necessary or reasonably requested for the transfer and conveyance to Buyer
of the Purchased Assets.
(c) A certificate, signed by an officer of each of Castle and
of each other Seller which is a corporation (on behalf of such corporation and
of any partnership of which such corporation is a general partner), stating that
the representations and warranties made by the Sellers in this Purchase
Agreement are true and correct in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on or given on and as of the Closing Date, that the Sellers have in all
material respects performed and complied with all of their obligations under
this Purchase Agreement which are to be performed or complied with by them prior
to or on the Closing Date, and that to the Knowledge of Sellers all conditions
to the obligations of Buyer to be performed hereunder have been satisfied or
waived. The delivery of such certificate shall be and constitute a
representation and warranty of each Seller as of the Closing Date to each of the
facts stated therein.
(d) A written opinion of counsel for the Sellers and IOC,
respectively, dated as of the Closing Date, addressed and reasonably
satisfactory to Buyer, covering the following matters:
(i) the corporate existence and good standing of Castle
and the corporate or partnership existence, and good standing of the Castle
Subsidiaries and IOC;
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(ii) the due authorization, execution, and delivery by
the Sellers of this Purchase Agreement, the Escrow Agreement and the other
agreements and instruments to be delivered by Sellers at Closing, and by IOC of
the Platinum Documents to which it is a party, and the legal, valid, and binding
effect of the Sellers' obligations hereunder and thereunder, and of IOC's
obligations under the Platinum Documents, enforceable against Seller in
accordance with the terms hereof and thereof, except as may be limited by Laws
affecting bankruptcy, insolvency, fraudulent conveyance, and creditors' rights
generally and subject to equitable principles and the discretion of a court to
grant equitable remedies;
(iii) the requisite corporate or partnership power and
authority of the Castle Subsidiaries and IOC to own and operate their respective
businesses;
(iv) the capitalization of the Acquired Corporation and
the other matters referred to in Section 4.5;
(v) that, subject to the receipt of the Required
Filings and Approvals, the execution and delivery of the Seller Documents and
the Platinum Documents do not, and the consummation of the Transactions
contemplated hereby and thereby will not, violate any provision of the
organizational documents of Castle, the Castle Subsidiaries or IOC, or any Law
to which the Castle Entities or IOC are subject or bound or, to the knowledge of
such counsel, result in the default or acceleration of any obligation or default
under any provisions of any Contract or Order known to such counsel to which
Castle or any of the Castle Subsidiaries or IOC is a party, or by which the
business of the Castle Subsidiaries or IOC is bound or encumbered; and
(vi) to the knowledge of such counsel, without
independent investigation, the existence of all Required Filings and Approvals
of the Castle Entities and IOC indicated as material Required Filings and
Approvals on the Schedules hereto.
(e) A certified copy of the duly adopted resolutions of the
Board of Directors of each Seller and IOC which is a corporation authorizing and
recommending the Transactions (on behalf of such corporation and of any
partnership of which such corporation is a general partner).
(f) A copy of each approval, consent, assignment, contract,
novation, release, or waiver, including the Required Filings and Approvals of
Castle, obtained by the Sellers in connection with the Transactions, and a
schedule of any Required Filings and Approvals of Castle that have not been
obtained.
(g) A duly executed and valid certificate of non-foreign
status in accordance with Section 1445 of the Code and the Treasury Regulations
thereunder.
(h) The Escrow Agreement duly executed by Castle and IRLP.
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(i) The Platinum Sale Documents duly executed by IOC.
(j) Such other documents, instruments, or certificates as
Buyer may reasonably request, including UCC-3 termination statements duly
executed by IOC and its assignees with respect to all Purchased Assets on which
they may have a Lien.
Section 12.3 Items to be Delivered by Buyer. At the Closing, Buyer
shall deliver, among other things:
(a) A certificate, signed by an officer of Buyer, stating
that the representations and warranties made by Buyer in this Purchase Agreement
are true and correct in all material respects on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
or given on and as of the Closing Date, that Buyer has in all material respects
performed and complied with all of its obligations under this Purchase Agreement
which are to be performed or complied with by it prior to or on the Closing
Date, and that to the Knowledge of Buyer all conditions to the obligations of
Sellers to be performed hereunder have been satisfied or waived. The delivery of
such certificate shall be and constitute a representation and warranty of Buyer
as of the Closing Date to each of the facts stated therein.
(b) A written opinion of counsel for Buyer or Assignee, as
applicable, dated as of the Closing Date, addressed and reasonably satisfactory
to the Sellers, covering the following matters:
(i) the corporate existence and good standing of Buyer
and the partnership existence of Assignee, if applicable;
(ii) the due authorization, execution, and delivery by
Buyer of this Purchase Agreement, the Escrow Agreement and the other Buyer
Documents, and of the Platinum Documents, and the legal, valid, and binding
effect of Buyer's obligations hereunder and thereunder, enforceable against
Buyer in accordance with the terms hereof and thereof, except as may be limited
by Laws affecting bankruptcy, insolvency, fraudulent conveyance, and creditors'
rights generally and subject to the discretion of a court to grant equitable
remedies;
(iii) that, subject to the receipt of the Required
Filings and Approvals, the execution and delivery of this Purchase Agreement and
the other Buyer Documents, and of the Platinum Documents do not, and the
consummation of the Transactions will not, violate any provision of the
certificate of incorporation of Buyer or partnership agreement of Assignee, as
applicable, or any Law to which Buyer is known to such counsel to be subject or
bound (before giving effect to the Transactions to be consummated at Closing)
or, to the knowledge of such counsel, result in the default or acceleration of
any obligation or default under any provision of any Contract known to such
counsel to which Buyer is a party (before giving effect to the Transactions to
be consummated at Closing); and
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(iv) to the knowledge of such counsel, without
independent investigation,
the existence of all Required Filings and Approvals of Buyer indicated as
material Required Filings and Approvals on Schedule 5.3 hereto.
(c) The duly executed Seller Note, Mortgage and Escrow
Agreement.
(d) A certified copy of the duly adopted resolutions of the
Board of Directors of Buyer (or of the general partner of Assignee, if
applicable) authorizing the Transactions.
(e) A copy of each approval, consent, assignment, contract,
novation, release, or waiver, including the Required Filings and Approvals of
Buyer obtained by Buyer in connection with the Transactions and a schedule of
any Required Filings and Approvals of Buyer that have not been obtained.
(f) An agreement pursuant to which Buyer assumes the Assumed
Liabilities.
(g) The duly executed Platinum Sale Documents.
(h) Such other documents, instruments, and certificates as
Castle may reasonably request.
XIII. TERMINATION
Section 13.1 Termination. This Purchase Agreement may be terminated
and the purchase and sale of the Shares and Purchased Assets abandoned at any
time prior to the Closing Date:
(a) by mutual consent of Castle and Buyer;
(b) by Buyer, if by the Termination Date any of the
conditions provided in Article IX of this Purchase Agreement have not been met
and have not been waived in writing by Buyer, except as a result of the wilful
acts or omissions of Buyer; or
(c) by Castle, if by the Termination Date any of the
conditions provided in Article X of this Purchase Agreement have not been met
and have not been waived in writing by Castle, except as a result of the wilful
acts or omissions of Castle.
(d) The obligations contained in Sections 7.4, 8.2, 15.8 and
15.13 hereof shall survive any termination of this Purchase Agreement.
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Section 13.2 No Other Transaction. (a) Each of Castle and the Asset
Sellers hereby covenants with Buyer that it will not enter into, or commit to,
any transaction to sell or otherwise dispose of any of the Shares or the
Purchased Assets with any Person other than Buyer prior to the close of business
on the Termination Date. Upon execution of this Agreement the provisions of
clause (b) of the third paragraph of that certain letter of intent between
Castle and Gadgil Western America, Inc. dated November 9, 1995 shall be
superseded by the provisions of this Section 13.2.
(b) Subject to the controlling provisions of Section 13.2(a),
Buyer agrees that the Castle Entities and their Affiliates shall have the
complete right and authority to, and to authorize and permit their officers,
directors, employees, counsel, agents, investment bankers, accountants, or other
representatives to, directly or indirectly, (a) cooperate with, or, subject to
entering into a confidentiality agreement reasonable acceptable to Buyer with
such Person, furnish or cause to be furnished any non-public information
concerning the business, properties, or assets of the Castle Subsidiaries to,
any Person in connection with any Acquisition Proposal excluding, however, this
Purchase Agreement and its contents (unless otherwise required to be made
public); and (b) negotiate with any Person with respect to any Acquisition
Proposal; provided, however, that the Castle Entities and their Affiliates shall
not take, authorize, or permit any of their officers, directors, employees,
counsel, agents, investment bankers, accountants, or other representatives to,
directly or indirectly, at any time after the date hereof, initiate contact with
any Person in an effort to solicit any Acquisition Proposal; provided, that the
Castle Entities may take or permit any such action at any time when Castle is
permitted to terminate this Purchase Agreement pursuant to Section 13.1.
XIV. AMENDMENT AND WAIVER
Section 14.1 Amendment. This Purchase Agreement may be amended or
modified in whole or in part at any time by an agreement in writing executed in
the same manner as this Purchase Agreement.
Section 14.2 Extension; Waiver. At any time prior to the Closing Date,
either party hereto may:
(a) extend the time for the performance of any of the
obligations or other acts of the other party hereto,
(b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, or
(c) waive compliance with any of the agreements or conditions
contained herein.
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Any agreement on the part of a party to any such extension or waiver shall be
valid only if set forth in an instrument in writing duly executed and delivered
on behalf of such party. The failure of any party hereto to enforce at any time
any provision of this Purchase Agreement shall not be construed to be a waiver
of such provision, nor in any way to affect the validity of this Purchase
Agreement or any part hereof or the right of such party hereafter to enforce
each and every such provision. No waiver of any breach of this Purchase
Agreement shall be held to constitute a waiver of any other or subsequent
breach.
XV. MISCELLANEOUS
Section 15.1 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, sent by Federal Express, Express Mail, or similar
overnight delivery or courier service, or delivered (in person or by telecopy,
telex, or similar communications equipment) against receipt to the party to whom
it is given, addressed as follows:
if to the Sellers, to:
Castle Energy Corporation
One Radnor Corporate Center
Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Joseph L. Castle, II, CEO
Telecopy No: (610) 995-0409
with a copy to:
Duane, Morris & Heckscher
One Liberty Street
Philadelphia, PA 19103
Attention: Sheldon M. Bonovitz, Esq.
Telecopy No: (215) 979-1020
if to Buyer, to:
Am West GP, Inc.
c/o Latham & Watkins
885 Third Avenue, Suite 1000
New York, NY 10022
Attention: Arun Chandrachud
Telecopy No: (212) 751-4864 and (011)(973) 697845
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with a copy to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Attention: Roger H. Kimmel, Esq.
Telecopy No: (212) 751-4864
or to such other address as the Person to whom notice is given may have
previously furnished to the other party in writing in accordance herewith.
Section 15.2 Governing Law. This Purchase Agreement shall be governed
by and construed in accordance with the laws of the State of New York, without
regard to its rules on conflicts of law.
Section 15.3 Successors and Assigns. This Purchase Agreement and the
Escrow Agreement shall not be assigned by any party without the written consent
of all other parties and any attempted assignment without such written consent
shall be null and void and without legal effect; provided that (a) Buyer may
assign this Agreement (and the Escrow Agreement) to Assignee and Buyer or
Assignee may assign its rights to purchase all or a portion of the Purchased
Assets and/or Shares to a wholly-owned subsidiary of Buyer or Assignee, as the
case may be, and (b) Buyer, Assignee or any such subsidiary may collaterally
assign its rights hereunder to any lenders providing financing. Upon assignment
of this Purchase Agreement to Assignee by Buyer, the term "Buyer", whenever used
in this Agreement, shall mean Assignee, unless the context otherwise requires.
This Purchase Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns and shall
inure to the benefit of the Persons entitled to indemnity under Article XI.
Section 15.4 Partial Invalidity. In case any one or more of the
provisions contained herein shall, for any reason, be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of this Purchase
Agreement, but this Purchase Agreement shall be construed as if such invalid,
illegal, or unenforceable provision or provisions had never been contained
herein unless the deletion of such provision or provisions would result in such
a material change as to cause completion of the Transactions to be unreasonable
or would materially and adversely frustrate the objectives of the parties as
expressed in this Purchase Agreement.
Section 15.5 Execution in Counterparts. This Purchase Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement, and shall become a binding agreement when one or more
counterparts have been signed by each of the parties and delivered to each of
the other parties.
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Section 15.6 Titles and Headings. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Purchase Agreement.
Section 15.7 Entire Agreement. This Purchase Agreement, together with
all schedules and exhibits hereto and any documents delivered pursuant to this
Purchase Agreement, contains the entire understanding of the parties hereto with
regard to the subject matter contained herein.
Section 15.8 Announcements. Announcements to the public, employees,
customers, or suppliers concerning the Transactions by the Sellers or Buyer
shall be subject to the approval of the other parties in all essential respects,
except that the approval by the other parties shall not be required as to any
statements and other information which a party may submit to any Governmental
Entity or is required to announce pursuant to any Law.
Section 15.9 Construction. The parties acknowledge that both parties
and their counsel have participated fully in the negotiation and preparation of
this Purchase Agreement and agree that, in any construction or interpretation of
this Purchase Agreement, no provision shall be construed against the interest of
either party on the basis that such party drafted such provision.
Section 15.10 Jurisdiction. Any action, suit, or proceeding arising
out of, based on, or in connection with this Purchase Agreement, or the
Transactions may be brought only in any United States District Court or
appropriate state court in the State of Delaware and each party covenants and
agrees not to assert, by way of motion, as a defense, or otherwise, in any such
action, suit, or proceeding, any claim that it is not subject personally to the
jurisdiction of such court, that its property is exempt or immune from
attachment or execution, that the action, suit, or proceeding is brought in an
inconvenient forum, that the venue of the action, suit, or proceeding is
improper, or that this Purchase Agreement or the subject matter hereof may not
be enforced in or by such court.
Section 15.11 Further Actions. At any time and from time to time, each
party hereto agrees, without further consideration, to take such actions and to
execute and deliver such documents as may be reasonably necessary to effectuate
the purposes of this Purchase Agreement and to more effectively carry out the
transfer of stock and assets, realization of assets, and assumption of
liabilities contemplated by this Purchase Agreement.
Section 15.12 Shell Litigation. (a) Until the Closing, Castle and IRLP
shall control the prosecution, defense and negotiation of any settlement of the
Shell Litigation, in each case with counsel of its choice, and Castle and IRLP
shall bear all Litigation Expenses with respect thereto incurred prior to the
Closing. Any settlement effected or judgment rendered in the Shell Litigation
prior to the Closing shall be solely for the account of Castle.
44
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(b) Upon and following the Closing, Buyer shall assume and
control the prosecution, defense and negotiation of any settlement of the Shell
Litigation, and shall bear all Litigation Expenses incurred after the Closing
with respect thereto. Any settlement effected or judgment rendered in the Shell
Litigation after the Closing shall be solely for the account of Buyer. Upon
request, all parties to the Shell Litigation that are controlled by Castle shall
execute, deliver and file any and all papers and documents as may be required to
effectuate the intent of this paragraph (b).
Section 15.13 Expenses. Each party hereto shall pay its own costs and
expenses incident to this Purchase Agreement and to action taken in preparation
for carrying this Agreement into effect.
45
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IN WITNESS WHEREOF, the parties hereto have caused this
Purchase Agreement to be duly executed as of the date and year first above
written.
AM WEST G.P., INC.
By: /S/ B. N. BANERJEE
---------------------------------
Title: B. N. BANERJEE, PRESIDENT
---------------------------------
CASTLE ENERGY CORPORATION
By: /S/ JOSEPH L. CASTLE
---------------------------------
Title:
---------------------------------
INDIAN REFINING I LIMITED PARTNERSHIP
By: INDIAN REFINING & MARKETING I INC.,
General Partner
By: /S/ WILLIAM S. SUDHAUS
---------------------------------
Title: WILLIAM S. SUDHAUS, CEO
---------------------------------
INDIAN REFINING & MARKETING I INC.
By: /S/ WILLIAM S. SUDHAUS
---------------------------------
Title: WILLIAM S. SUDHAUS, CEO
---------------------------------
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ENERGY MERCHANT CORP.,
POC ACQUISITION CORPORATION,
POWERINE HOLDING CORP.,
CASTLE ENERGY CORPORATION
AND
POWERINE OIL COMPANY
January 10, 1996
<PAGE>
TABLE OF CONTENTS
Page
I. DEFINITIONS........................................................ 1
1.1 Definitions............................................... 1
II. THE MERGER......................................................... 6
2.1 The Merger................................................ 6
2.2 Effective Time............................................ 6
2.3 Effect of the Merger...................................... 6
2.4 Articles of Incorporation and By-laws..................... 7
2.5 Directors................................................. 7
2.6 Officers.................................................. 8
III. CONVERSION OF SECURITIES........................................... 8
3.1 Conversion of Capital Stock............................... 8
3.2 Delivery of Certificates.................................. 9
IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER, THE
COMPANY AND CASTLE................................................. 9
4.1 Organization and Good Standing............................ 9
4.2 Authorization; Enforceability............................. 10
4.3 Consents and Approvals.................................... 10
4.4 No Violation.............................................. 10
4.5 Capitalization............................................ 10
4.6 Taxes..................................................... 11
4.7 No Broker................................................. 11
V. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND SUB............... 11
5.1 Organization and Good Standing........................... 11
5.2 Authorization; Enforceability............................ 12
5.3 Consents and Approvals................................... 12
5.4 No Violation............................................. 12
5.5 No Broker................................................ 12
5.6 Capitalization; Total Assets or Annual Net Sales......... 13
5.7 Financial Condition...................................... 14
5.8 Irrevocable Subscription................................. 14
5.9 Prior Asset Sales ....................................... 15
VI. TAX MATTERS....................................................... 15
6.1 Tax Treatment of Merger.................................. 15
6.2 Access to Information.................................... 16
6.3 Certain Consolidated Return Matters...................... 17
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6.4 Sales and Transfer Taxes................................ 17
6.5 Cooperation on Tax Matters.............................. 17
VII. COVENANTS OF THE COMPANY, THE SHAREHOLDER AND CASTLE............ 18
7.1 Access to Information................................... 18
7.2 Actions Prior to Closing Date........................... 18
7.3 Confidentiality......................................... 19
7.4 Insurance............................................... 19
VIII. COVENANTS OF THE PARENT AND SUB.................................. 20
8.1 Confidentiality......................................... 20
8.2 Additional Covenants.................................... 20
8.3 Outside Management...................................... 21
8.4 Subscription............................................ 22
8.5 Prior Asset Sale........................................ 22
8.6 Legal Fees.............................................. 23
8.7 Cooperation in Arbitration.............................. 23
IX. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB...................... 24
9.1 Truth of Representations and Warranties................. 24
9.2 Compliance with Covenants............................... 24
9.3 Absence of Suit......................................... 24
9.4 Proceedings and Instruments Satisfactory; Certificates.. 24
9.5 Intercompany Indebtedness............................... 25
9.6 Deliveries at Closing................................... 25
X. CONDITIONS TO OBLIGATIONS OF THE COMPANY, THE
SHAREHOLDER AND CASTLE........................................... 26
10.1 Truth of Representations and Warranties................. 26
10.2 Compliance with Covenants............................... 26
10.3 Absence of Suit......................................... 26
10.4 Proceedings and Instruments Satisfactory; Certificates.. 26
10.5 Waivers, Releases, and Resignations..................... 27
10.6 Deliveries at Closing................................... 27
10.7 Intercompany Indebtedness............................... 27
10.8 Tax Clearance Certificate............................... 27
10.9 Subscription............................................ 27
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XI. INDEMNIFICATION.................................................. 27
11.1 Requirement of Indemnification.......................... 27
11.2 Procedures Relating to Indemnification.................. 29
11.3 Defense of Third-Party Claim............................ 30
11.4 Payment................................................. 30
XII. CLOSING.......................................................... 31
12.1 Time and Place.......................................... 31
12.2 Items to be Delivered by Castle and the Company......... 31
12.3 Items to be Delivered by Parent and Sub................. 32
XIII. TERMINATION...................................................... 34
13.1 Termination............................................. 34
13.2 Survival after Termination.............................. 34
XIV. AMENDMENT AND WAIVER............................................. 34
14.1 Amendment............................................... 34
14.2 Extension; Waiver....................................... 34
XV. MISCELLANEOUS.................................................... 35
15.1 Notices................................................. 35
15.2 Expenses................................................ 36
15.3 Governing Law........................................... 36
15.4 Successors and Assigns.................................. 36
15.5 Partial Invalidity...................................... 37
15.6 Execution in Counterparts............................... 37
15.7 Titles and Headings..................................... 37
15.8 Entire Agreement........................................ 37
15.9 Announcements........................................... 37
15.10 Construction............................................ 38
15.11 Jurisdiction............................................ 38
15.12 Further Actions......................................... 38
15.13 Cancellation of Insurance Policies...................... 38
15.14 No Third Party Beneficiaries............................ 39
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated as of
January 10, 1996, by and among CASTLE ENERGY CORPORATION, a Delaware corporation
("Castle"), POWERINE HOLDING CORP., a Delaware corporation (the "Shareholder"),
POWERINE OIL COMPANY, a California corporation (the "Company"), ENERGY MERCHANT
CORP., a Delaware corporation ("Parent") and POC ACQUISITION CORPORATION, a
California corporation and wholly-owned subsidiary of the Parent ("Sub").
WITNESSETH:
-----------
WHEREAS, Castle owns, beneficially and of record, all of the
outstanding capital stock of the Shareholder, which in turn owns of record all
of the outstanding capital stock of the Company;
WHEREAS, the Boards of Directors of Castle, the Parent, Sub, the
Shareholder and the Company deem it advisable and in the best interests of their
respective shareholders and corporations to consummate and have approved the
business combination provided for herein in which the Company would merge with
and into Sub and Sub, as the surviving corporation, would remain a wholly owned
subsidiary of the Parent (the "Merger");
NOW, THEREFORE, in consideration of the
foregoing premises and the mutual covenants and agreements set forth herein, and
intending to be legally bound, Castle, the Shareholder, the Company, the Parent
and Sub hereby agree as follows:
I. DEFINITIONS
Section 1.1 Definitions. When used in this Merger Agreement, the
following words or phrases have the following meanings:
"Affiliate" shall mean a Person that directly, or indirectly through
one or more intermediaries, controls, is controlled by or is under common
control with another Person or beneficially owns or has the power to vote or
direct the vote of 50% or more of any class of voting stock or of any form of
voting equity interest of such other
<PAGE>
Person in the case of a Person that is not a corporation. For purposes of this
definition, "control," including the terms "controlling" and "controlled,"
means the power to direct or cause the direction of the management and
policies of a Person, directly or indirectly, whether through the ownership
of securities or partnership or other ownership interests, by contract or
otherwise.
"Arbitration" shall have the meaning set forth in Section 9.5 hereof.
"Asset Agreement" shall have the meaning set forth in Section 5.9
hereof.
"Assets" shall mean all rights, titles, franchises and interests in
and to every species of property, real, personal and mixed, tangible and
intangible, including, without limitation, cash and cash equivalents,
receivables, real property, together with buildings, structures and the
improvements thereon, fixtures contained therein and appurtenances thereto, and
easements and other rights relating thereto, machinery, equipment, furniture,
fixtures, leasehold improvements, vehicles and other assets or property, leases,
licenses, permits, approvals, authorizations, joint venture agreements,
contracts or commitments, whether written or oral, processes, trade secrets,
know-how, computer software, computer programs and source codes, protected
formulae, all other Intellectual Property, goodwill, prepaid expenses, records,
files, invoices, claims and privileges, and any other assets whatsoever.
"Assigned Interests" shall have the meaning set forth in Section 9.5
hereof.
"Balance Sheet" shall have the meaning set forth in Section 5.7
hereof.
"Castle" shall have the meaning set forth in the preamble hereto.
"Castle Indemnitees" shall mean Castle, any present or future parent
or subsidiary of Castle and their respective shareholders, officers, directors,
employees, counsel, agents, investment bankers, accountants and Affiliates.
"Closing" and "Closing Date" shall have the respective meanings set
forth in Section 12.1 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the preamble hereto.
"Company Common Stock" shall have the meaning set forth in Section 3.1
hereof.
"Consolidated Group" shall mean the affiliated group of corporations
within the meaning of Section 1504 of the Code in which the Company is included.
2
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"Contract" shall mean a contract, indenture, bond, note, mortgage,
deed of trust, lease, agreement or commitment, whether written or oral.
"Damages" shall mean losses, costs, liabilities, reasonable expenses
or other damages (including, without limitation, reasonable attorneys' fees and
expenses and any and all reasonable expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation).
"Effective Time" shall have the meaning set forth in Section 2.2
hereof.
"Environmental Claim" shall mean any claim by a Person alleging actual
or potential Liability of the Company, or of any other Castle Indemnitee
relating to the businesses of the Company, for any investigatory cost, cleanup
cost, governmental response cost, natural resources damage, property damage,
personal injury or penalty, arising out of, based on or resulting from (a) the
presence, transport, disposal, discharge or release of any Materials of
Environmental Concern at any location, whether or not owned by Castle or the
Company, as the case may be, or (b) circumstances forming the basis of any
violation or alleged violation of any Environmental Law.
"Environmental Law" shall mean all Laws relating to pollution or
protection of human health or the environment, including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata, and
including, without limitation, Laws relating to emissions, discharges, releases
or threatened releases, or the presence of Materials of Environmental Concern,
or otherwise relating to the manufacture, processing, distribution, use,
existence, treatment, storage, disposal, transport, recycling, reporting or
handling of Materials of Environmental Concern.
"Financing" shall have the meaning set forth in Section 8.3 hereof.
"GAAP" shall mean United States generally accepted accounting
principles consistently applied.
"GCL" shall have the meaning set forth in Section 2.1 hereof.
"Governmental Entity" shall mean a court, legislature, governmental
agency, commission, or administrative or regulatory authority or
instrumentality, domestic or foreign.
"Hansen" shall have the meaning set forthin Section 8.3 hereof.
3
<PAGE>
"Hodapp Note" shall have the meaning set forth in Section 5.7 hereof.
"Intellectual Property" shall mean marks, names, trademarks, service
marks, patents, patent rights, assumed names, logos, copyrights, trade names,
inventions, protected formulae, processes, proprietary information, trade
secrets, computer software, as well as related documentation and manuals, all
applications for registration of such items with any Governmental Entity, and
all licenses and research and development relating thereto.
"IRS" shall mean the Internal Revenue Service.
"Kenyen Note" shall have the meaning set forth in Section 6.1 hereof.
"Knowledge" of or with respect to (a) any individual shall mean the
actual knowledge of such individual and any knowledge such individual reasonably
should have had under the circumstances; (b) Castle or the Company shall mean
the Knowledge of the individuals listed on Schedule 4; and (c) the Parent shall
mean the Knowledge of the individual listed on Schedule 5.
"Law" shall mean a law, ordinance, rule, or regulation enacted or
promulgated, or an Order issued or rendered, by any Governmental Entity.
"Liability" shall mean a liability, obligation, claim or cause of
action of any kind or nature whatsoever, whether absolute, accrued, contingent
or other and whether known or unknown.
"License" shall mean a license, certificate of authority, permit or
other authorization to transact an activity or business or to use an asset or
process issued or granted by a Governmental Entity.
"Lien" shall mean a lien, mortgage, deed to secure debt, pledge,
security interest, lease, sublease, charge, levy or other encumbrance of any
kind.
"Materials of Environmental Concern" shall mean chemicals, pollutants,
contaminants, wastes, toxic or hazardous substances, petroleum, petroleum
additives, petroleum intermediates and petroleum products.
"MG" shall have the meaning set forth in Section 9.5 hereof.
"Merger" shall have the meaning set forth in the preamble hereto.
"Merger Agreement" shall mean this Agreement and Plan of Merger,
including the Short Form Agreement.
4
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"Officer's Certificate" shall have the meaning set forth in Section
2.2 hereof.
"Order" shall mean an order, writ, ruling, judgment, injunction or
decree of, or any stipulation to or agreement with, any arbitrator, mediator or
Governmental Entity.
"Parent" shall have the meaning set forth in the preamble hereto.
"Parent Indemnitees" shall mean the Parent, any present or future
parent or subsidiary of Parent, and their respective shareholders, officers,
directors, employees, counsel, agents, investment bankers, accountants, and
Affiliates.
"Payment" shall have the meaning set forth in Section 3.1 hereof.
"Person" shall mean an individual, corporation, partnership, limited
liability company, association, joint stock company, Governmental Entity,
business trust, unincorporated organization or other legal entity.
"Refinery" shall mean the Powerine Refinery located in Santa Fe
Springs, California and the LB Marine Terminal and offsite pipelines.
"Required Filings and Approvals" of a party shall mean any filing of
this Agreement with and the approval of such by all Governmental Entities and
such other applications, registrations, declarations, filings, authorizations,
Orders, consents and approvals as may be required to be made or obtained by such
party from any Person prior to consummation of the Merger.
"Shareholder" shall have the meaning set forth in the preamble hereto.
"Short Form Agreement" shall have the meaning provided in Section 2.2.
"Sub" shall have the meaning set forth in the preamble hereto.
"Sub Common Stock" shall have the meaning set forth in Section 3.1
hereof.
"Subscription" shall have the meaning set forth in Section 5.8 hereof.
"Surviving Corporation" shall have the meaning set forth in Section
2.1 hereof.
"Tax" shall mean any Federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, capital stock, franchise, profits,
gains, withholding, social security, unemployment, disability, real property,
personal property, sales, use, rental, transfer, registration, value added,
alternative or add-on minimum, estimated or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.
5
<PAGE>
"Tax Return" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto or amendment thereof.
"Third Party Claim" shall have the meaning as set forth in Section
11.2.
"Treasury Regulations" shall mean the regulations promulgated by the
Secretary of the Treasury pursuant to the Code and any predecessor and successor
thereto.
II. THE MERGER
Section 2.1 The Merger. Upon the terms and subject to the conditions
set forth in this Merger Agreement and in accordance with the California General
Corporation Law (the "GCL"), the Company shall be merged with and into Sub at
the Effective Time. Following the Effective Time, the separate corporate
existence of the Company shall cease and Sub shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to all rights and
property of the Company and shall become subject to all debts and liabilities of
the Company in accordance with the GCL.
Section 2.2 Effective Time. Subject to the provisions of this Merger
Agreement, as soon as practicable following the satisfaction or waiver of the
conditions set forth in Article IX and Article X hereof (to the extent permitted
therein), Sub and the Company shall execute and file a short form of merger
agreement in the form attached hereto as Schedule 2.2 ("Short Form Agreement")
together with a certificate of an appropriate officer of each of Sub and the
Company executed in accordance with the GCL (the "Officer's Certificate") and
shall make all other filings or recordings required by or under the GCL to
effectuate the Merger. The Merger shall become effective at such time as the
Short Form Agreement and the aforementioned Officer's Certificate for each of
the Company and Sub are duly filed by Sub with the Secretary of State of
California (the "Effective Time").
Section 2.3 Effect of the Merger. The Merger shall have the effects
set forth in the GCL. Without limiting the generality of the foregoing and
subject thereto, at the Effective Time:
6
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(a) the Company shall be merged with and into Sub, which shall survive as the
Surviving Corporation, and the separate corporate existence of the Company shall
thereupon cease and (b) all of the rights, property, privileges, powers and
franchises and all property and assets of every kind and description of the
Company and Sub shall vest in and be held and enjoyed by the Surviving
Corporation, without further act or deed, and all the estates and interests of
every kind of the Company and the Sub shall be as effectively the property of
the Surviving Corporation as they were of the Company and the Sub immediately
prior to the Merger and all rights of creditors and liens upon any property of
the Company and Sub shall be debts, liabilities and duties of the Surviving
Corporation and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it, and none of such
debts, liabilities or duties shall be expanded, increased, broadened or enlarged
by reason of the Merger.
Section 2.4 Articles of Incorporation and By-laws. (a) The Articles of
Incorporation of Sub as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law, except that Article
I of the Articles of Incorporation of the Surviving Corporation shall be amended
to provide as follows:
"I.
The name of this corporation is Powerine Oil Company."
(b) The By-laws of Sub as in effect at the Effective Time shall be the
By-laws of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
Section 2.5. Directors. The directors of Sub at the Effective Time
shall be the initial directors of the Surviving Corporation, each to hold office
from the Effective Time in accordance with the Articles of Incorporation and
By-laws of the Surviving Corporation and until his or her successor is duly
elected and qualified.
7
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Section 2.6. Officers. The officers of Sub at the Effective Time shall
be the initial officers of the Surviving Corporation, each to hold office from
the Effective Time in accordance with the Articles of Incorporation and By-laws
of the Surviving Corporation and until his or her successor is duly appointed
and qualified.
III. CONVERSION OF SECURITIES
Section 3.1 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Common Stock, par value $1.00 per share, of the Company (the "Company
Common Stock") or the holder of any shares of capital stock, par value $.01 per
share, of Sub (the "Sub Common Stock"):
(a) Capital Stock of Sub. Each issued and outstanding share of Sub
Common Stock shall remain issued and outstanding and be unaffected by the Merger
and shall represent one fully paid and nonassessable share of capital stock, par
value $.01 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock. All shares of Company Common
Stock, if any, that are owned by the Company shall be cancelled and retired and
shall cease to exist and no consideration shall be delivered in exchange
therefor.
(c) Payment for Company Common Stock. Each issued and outstanding
share of Company Common Stock, other than shares to be cancelled in accordance
with Section 3.1(b) hereof, if any, shall be converted into the right to receive
approximately $.3002205 in cash, for an aggregate of $1,000,000 (the "Payment").
All such shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to
exist, and each holder of a certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the Payment
upon the surrender of such certificate in accordance with Section 3.2 hereof,
without interest.
8
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Section 3.2 Delivery of Certificates. (a) Immediately after the
Effective Time and in connection with the Closing of the Merger, and upon
surrender by the Shareholder of a certificate representing all of the 3,330,885
outstanding shares of Company Common Stock, the Shareholder shall be entitled to
receive in exchange therefor the Payment and the certificate so surrendered
shall forthwith be cancelled.
(b) No Further Ownership Rights in Company Common Stock. The Payment
made upon the surrender of shares of Company Common Stock in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time.
IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER, THE
COMPANY AND CASTLE
The Shareholder, the Company and Castle jointly and severally
represent and warrant to the Parent and Sub as follows, subject to and qualified
by any fact or facts disclosed in this Merger Agreement or the Schedules hereto:
Section 4.1 Organization and Good Standing. Each of the Company and
the Shareholder is a corporation duly organized, validly existing and in good
standing under the Laws of the State of its incorporation or organization, with
all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted. Each of the
Company and the Shareholder is qualified or otherwise authorized to transact
business, and is in good standing, as a foreign corporation or in the respective
jurisdictions set forth in Schedule 4.1 attached hereto. The Company does not
directly or indirectly own any interest in any subsidiary or any other Person.
The Company has made available to Parent and Sub true, correct and complete
copies of its Articles of Incorporation, bylaws and minute books.
9
<PAGE>
Section 4.2 Authorization; Enforceability. Each of the Company, the
Shareholder and Castle has the requisite corporate power and authority to enter
into this Merger Agreement and consummate the Merger. The execution and delivery
of this Merger Agreement and the consummation of the Merger have been duly
approved and authorized by the Board of Directors of the Shareholder and by the
Board of Directors and sole stockholder of the Company and by the Board of
Directors and stockholders of Castle. No other corporate proceedings on the part
of the Company, the Shareholder or Castle will be necessary to authorize this
Merger Agreement and the Merger. The Merger Agreement has been duly executed and
delivered by the Company, the Shareholder and Castle and, assuming the Merger
Agreement is a legal, valid and binding obligation of the Parent and Sub,
constitutes a legal, valid and binding obligation of each of the Company, the
Shareholder and Castle, enforceable against each of them in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, moratorium or other similar Laws now or hereafter in
effect affecting the enforceability of creditor's rights or by general
principles of equity.
Section 4.3 Consents and Approvals. Assuming the accuracy of the
Parent's representation in Section 5.6 hereof, there are no Required Filings and
Approvals of the Company, the Shareholder or Castle in connection with the
execution and delivery of this Merger Agreement and the consummation of the
Merger.
Section 4.4 No Violation. The execution, delivery and performance of
this Merger Agreement by the Company, the Shareholder and Castle and the
consummation by them of the Merger contemplated hereby will not violate any
provision of the Certificate or Articles of Incorporation or by-laws of the
Company, the Shareholder or Castle.
10
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Section 4.5 Capitalization. The authorized capital stock of the
Company and the number of shares of Company Common Stock that are issued and
outstanding are set forth on Schedule 4.5 hereof. All of the shares of Company
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable and are owned of record as set forth in Schedule 4.5. There are no
other shares of the capital stock of the Company authorized, issued or
outstanding or reserved for issuance, no outstanding preemptive rights or
subscription rights with respect to any such shares and no outstanding options,
warrants, rights, voting trusts, convertible securities or other agreements or
commitments with respect to any such shares. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation or similar
rights with respect to the Company.
Section 4.6 Taxes. (a) The Company has joined in the filing of
consolidated Federal income Tax Returns by the Consolidated Group, and the
Company will continue to be included as a member of the Consolidated Group for
Federal income Tax purposes up to and including the Closing Date, including for
purposes of filing the consolidated Federal income Tax Return of the
Consolidated Group for its tax year which includes the Closing Date.
(b) The Consolidated Group has filed all material income and franchise
Tax Returns that it was required to file, and the Company has filed all material
income and franchise Tax Returns that it was required to file prior to the
Closing Date, and has paid any Taxes shown as due on such Tax Returns and all
property Taxes required to be paid prior to the Closing Date.
Section 4.7 No Broker. None of the Company, the Shareholder or Castle
has engaged or authorized any broker, investment banking firm, finder, agent or
other Person to act on its behalf, directly or indirectly, as a broker or finder
in connection with the Merger.
V. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND SUB
The Parent and Sub jointly and severally represent and warrant to the
Company, the Shareholder and Castle as follows:
Section 5.1 Organization and Good Standing. Each of the Parent and Sub
is a corporation duly organized, validly existing and in good standing under the
Laws of its respective state of organization, and is duly qualified and in good
standing in each jurisdiction in which the ownership of its Assets or the
conduct of its business makes such qualification necessary.
11
<PAGE>
Section 5.2 Authorization; Enforceability. Each of the Parent and Sub
has the requisite corporate power and authority to enter into this Merger
Agreement and to consummate the Merger. The execution and delivery of this
Merger Agreement and the consummation of the Merger have been duly approved and
authorized by the Board of Directors and the stockholders entitled to vote
thereon of each of the Parent and Sub. No other corporate proceedings on the
part of either the Parent or Sub are necessary to authorize this Merger
Agreement and the Merger. This Merger Agreement has been duly authorized,
executed and delivered by the Parent and the Sub. Assuming this Merger Agreement
is a legal, valid and binding obligation of the Company and Castle, this Merger
Agreement constitutes a legal, valid and binding obligation of each of the
Parent and Sub, enforceable against each of the Parent and Sub in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, moratorium or other similar Laws now or
hereafter in effect affecting the enforceability of creditor's rights or by
general principles of equity.
Section 5.3 Consents and Approvals. There are no Required Filings and
Approvals of either the Parent or Sub in connection with the execution and
delivery of this Merger Agreement and the consummation of the Merger.
Section 5.4 No Violation. The execution, delivery and performance of
this Merger Agreement by the Parent and Sub and the consummation by each of them
of the Merger will not (a) violate any provision of the charter or the by-laws
of either the Parent or Sub or (b) violate, conflict with, result in a breach of
any provision of, constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, result in the termination of
or accelerate the performance required by, result in a right of termination or
acceleration under or result in the creation of any Lien upon any of the Assets
of either the Parent or Sub under the terms of any Contract to which either the
Parent or Sub is a party or to which it or any of its respective Assets may be
subject.
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Section 5.5 No Broker. As of the date hereof, neither the Parent nor
Sub has engaged or authorized any broker, investment banking firm, finder, agent
or other Person to act on its behalf, directly or indirectly, as a broker or
finder in connection with the Transactions, except Pennsylvania Merchant Group.
The Parent shall be responsible for and agrees to indemnify the Company and
Castle from and against any fees or commissions payable to Pennsylvania Merchant
Group in connection with the Merger.
Section 5.6 Capitalization; Total Assets or Annual Net Sales. (a) All
of the issued and outstanding shares of Sub Common Stock are owned of record by
Parent. Except for the Parent and Siegfried K. Hodapp, no Person beneficially
owns, directly or indirectly, 50% or more of the outstanding voting securities
of Sub or has the contractual power presently to designate 50% or more of the
directors of Sub.
(b) Except for Siegfried K. Hodapp, no Person beneficially owns,
directly or indirectly, 50% or more of the outstanding voting securities of the
Parent or has the contractual power presently to designate 50% or more of the
directors of the Parent.
(c) The sum of (i) the value of all investment assets, voting
securities and income producing property beneficially owned, directly or
indirectly, by Mr. Hodapp (including without limitation any such assets,
securities or property beneficially owned, directly or indirectly, by Mr.
Hodapp's spouse or minor children, if any) plus (ii) the aggregate value of all
assets held, directly or indirectly, by any Person as to which Mr. Hodapp (A)
either (1) beneficially owns 50% or more of the outstanding voting securities or
(2) if such Person does not have outstanding voting securities, has the right to
50% or more of the profits of the Person or has the right to 50% or more of the
assets of the Person in liquidation or (B) has the contractual power presently
to designate 50% or more of the directors or, in the case of unincorporated
Persons, individuals exercising similar functions, is less than $10 million.
(d) The aggregate annual net sales of all Persons as to which Mr.
Hodapp (i) either (A) beneficially owns 50% or more of the outstanding voting
securities or (B) if such Person does not have outstanding voting securities,
has the right to 50% or more of the profits or 50% or more of the assets in
liquidation or (ii) has the contractual power presently to designate 50% or more
of the directors or, in the case of unincorporated Persons, individuals
exercising similar functions, is less than $10 million.
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(e) The Parent and Sub understand that the Company and Castle are
relying on this representation, among other things, in determining whether any
notice must be filed with the United States Department of Justice and Federal
Trade Commission in connection with the Merger.
Section 5.7 Financial Condition. (a) At Closing, the Parent shall
deliver to the Company an unaudited balance sheet dated as of such date, which
balance sheet (the "Balance Sheet") shall reflect assets consisting of (i) at
least $1 million in cash, (ii) either (A) a promissory note jointly made by
Siegfried K. Hodapp and Sibylle M. Hodapp, his spouse, in the original principal
amount of $2 million payable to the order of Parent (the "Hodapp Note") or (B)
other assets which Castle, the Shareholder and the Company agree have a fair
market value of at least $2 million and (iii) other assets with a value at least
equal to any liabilities reflected thereon. The Balance Sheet was prepared
substantially in accordance with GAAP and presents fairly the financial
condition, assets, liabilities and stockholders' equity of the Parent as of its
date.
(b) Mr. Hodapp has delivered to the Company an unaudited balance sheet
as of the date immediately prior to the date hereof and an unaudited statement
of income for the twelve months ended December 31, 1994, which balance sheet and
income statement reflect the assets referenced in Section 5.6(c) hereof and the
net sales, if any, referenced in Section 5.6(d) hereof. Such balance sheet and
income statement were prepared in accordance with the accounting principles
normally used by Mr. Hodapp and present fairly the financial condition, assets,
liabilities and net sales of Mr. Hodapp as of the date and for the period
covered thereby.
Section 5.8 Irrevocable Subscription. Parent has received from W.
Arthur Benson an irrevocable subscription (the "Subscription") to purchase
shares of Parent's capital stock for a purchase price equal to not less than the
lesser of (a) $2 million or (b) the aggregate net proceeds to Mr. Benson of (a)
the arbitration award issued with respect to the matter captioned Benson v.
Metallgesellschaft Corp. or (ii) any settlement to which Mr. Benson becomes a
party in connection therewith. Such Subscription requires Mr. Benson to complete
the purchase of such shares on demand or within five business days after the
receipt of such proceeds. A true, correct and complete copy of such Subscription
has been delivered to Castle. Parent covenants and agrees that it will demand
that Mr. Benson complete such purchase within five business days after the
receipt by Mr. Benson of such proceeds.
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Section 5.9 Prior Asset Sales. Parent and Sub acknowledge and
represent that they have been advised by Castle, the Shareholder and the Company
that the Company has previously sold substantially all of the equipment and
machinery and certain related assets necessary for the operation of the Refinery
to Kenyen Projects Limited pursuant to the terms and provisions of an Asset
Purchase Agreement between the Company and Kenyen Projects Limited dated
September 29, 1995 (the "Asset Agreement") and that the Company has sold other
material assets related to the operation of the Refinery to other third parties.
Parent and Sub acknowledge and represent that, in order for the Refinery to be
restarted, the Surviving Corporation will be required to acquire the requisite
equipment, machinery and related assets from Kenyen Projects Limited or an
unrelated third party.
VI. TAX MATTERS
Section 6.1 Tax Treatment of Merger. Notwithstanding that the Merger
qualifies as a statutory merger of the Company into Sub under Sections 1100-1305
of the California Corporation Code, the parties acknowledge that under the Code
the Merger for Federal income Tax and California income tax purposes is treated
as a taxable sale of the assets of the Company, including without limitation a
promissory note from Kenyen Projects Limited dated September 29, 1995, in the
original principal amount of $19,763,000 (the "Kenyen Note") by the Company to
Sub in consideration for the assumption of all of the liabilities of the
Company, including without limitation estimated liabilities of approximately
$32.1 million as of December 31, 1995 on a GAAP basis (including environmental
liabilities which Parent and Sub acknowledge to be approximately $23.6 million
as of December 31, 1995) and all liabilities of the Company for state and local
Taxes regardless of the party against whom such Taxes are assessed, by Sub and
$1 million in cash to be transferred by Sub to the Company for distribution to
the Shareholder. The Federal income Tax consequences of the sale of the
Company's assets will be reported on the consolidated Federal income Tax Return
of the Consolidated Group for the taxable year of the Consolidated Group in
which the sale of assets by the Company occurs and the California income tax
consequences of the sale of the Company's assets will be reported on the
Company's final California income tax return for the taxable year in which the
sale of assets by the Company occurs. Parent and Sub acknowledge and agree that
for all purposes, including but not limited to Tax reporting purposes, the
Kenyen Note will be given effect at its fair market value of $19,763,000 and
that neither of them will take or permit to be taken any action inconsistent
with such value. The consideration for the assets deemed to be sold by the
Company to Sub for Federal income Tax purposes shall be allocated among such
assets as set forth on Schedule 6.1 attached hereto, and the parties shall use
such allocation for all Tax reporting and other purposes, including without
limitation the preparation of Form 8594.
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Section 6.2 Access to Information. (a) Following the Closing, Castle
and Shareholder will make available to the Parent any information relating to
the Company which has been included in the consolidated Federal income Tax
Returns filed by the Consolidated Group for the taxable years up to and
including the Closing Date that is relevant for purposes of determining the tax
liabilities and attributes of the Company up to and including the Closing Date,
as is reasonably necessary for the preparation of any Tax Return, and for
purposes of dealing with any examination by or controversy with the IRS or any
other taxing authority. Castle and Shareholder agree to retain all books and
records with respect to tax matters pertinent to the Company relating to any
period beginning before the Closing Date until the expiration of the statute of
limitations and any extension thereof.
(b) Following the Closing, the Parent agrees to make available to
Castle and Shareholder any information relating to the Company (including, but
not limited to, its books and records and work papers for all periods in which
the Company has been included as a member in the Consolidated Group for purposes
of filing consolidated Federal income Tax Returns) that is relevant for purposes
of determining the tax liability of the Consolidated Group for all periods up to
and including the Closing Date, as is reasonably necessary for the preparation
of any Tax Return, and for purposes of dealing with any examination by or
controversy with the IRS or any other taxing authority.
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Section 6.3 Certain Consolidated Return Matters. (a) Any tax sharing
agreement between Castle, the Shareholder and the Company shall be terminated as
of the Closing Date, and shall have no further effect for any taxable year.
(b) Castle shall include the income or loss of the Company for periods
through the Closing Date in the consolidated Federal income Tax Return filed by
the Consolidated Group for the period including the Closing Date. Castle shall
prepare books and working papers which will clearly demonstrate the income and
activities of the Company for the period ending on the Closing Date.
(c) Castle at its sole cost and expense shall be responsible for the
preparation and filing of all state income tax returns for the Company for
taxable periods ending on the Closing Date in states the income tax laws of
which require income tax returns for such periods. Castle shall permit the
Parent and Sub to review and comment on each such tax return described in the
preceding sentence.
(d) Castle hereby represents and warrants that it has paid and
covenants that it will pay all Federal income Taxes due by any member of the
Consolidated Group for all periods during which the Company was a member of such
Consolidated Group. Castle further covenants that the Company shall have no
responsibility for any liability for any such Federal income Taxes, whether
pursuant to treasury Regulation Section 1.1502-6, any successor provisions
thereto, or otherwise.
Section 6.4 Sales and Transfer Taxes. Castle and Shareholder shall pay
one-half of, and Parent and Sub shall pay one-half of, (i) any and all sales and
use taxes and transfer taxes attributable to the transactions contemplated by
this Agreement, and (ii) any expenses (including reasonable attorney's fees)
incurred by any of the parties in defending any claim for such Taxes, and in the
event such Taxes are assessed against any of such parties after the Merger, the
other parties shall reimburse and indemnify the party making payment thereof in
order to carry out this agreement.
Section 6.5 Cooperation on Tax Matters. Each of the parties shall
cooperate fully, as and to the extent reasonably requested by any other party,
in connection with the filing of Tax Returns pursuant to this Section and any
audit, litigation or other proceeding with respect to any Tax or Taxes,
including specifically any administrative or judicial proceeding regarding any
state or local tax consequences arising as a result of the Merger.
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VII. COVENANTS OF THE COMPANY, THE SHAREHOLDER AND CASTLE
The Company, the Shareholder and Castle covenant and agree with the
Parent as follows:
Section 7.1 Access to Information. From and after the date of this
Merger Agreement, the Parent and its authorized representatives shall upon
reasonable notice have access during normal business hours to all properties,
books, records, Contracts, and documents of the Company, the Shareholder and of
Castle relating to the Company, including without limitation all such
consolidating financial statements and financial statements of the Company as
are prepared in the normal course of the preparation of Castle's audited
financial statements and Castle, the Shareholder and the Company shall furnish
or cause to be furnished to the Parent and its authorized representatives
information with respect to the affairs and business of the Company as the
Parent may reasonably request.
Section 7.2 Actions Prior to Closing Date. From and after the date of
this Merger Agreement and until the Closing Date or termination of this Merger
Agreement:
(a) Neither the Company nor Castle shall undertake or
institute any action other than in the ordinary course of business of the
Company which could reasonably be expected to have a material adverse effect on
the assets, properties, financial condition, or operating results of the Company
taken as a whole.
(b) Castle shall not and shall not permit the Company to sell
or issue any shares of capital stock of the Company or any securities
convertible or exchangeable for, or options, warrants, commitments, or rights of
any kind to acquire, any such shares of capital stock.
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(c) Castle shall promptly notify the Parent of any material lawsuits,
claims, proceedings, or investigations of which Castle has Knowledge that may be
threatened, brought, asserted, or commenced against or involving the Company or
the Merger.
Section 7.3 Confidentiality. Castle shall use its commercially
reasonable efforts to insure that all confidential information which Castle, the
Company, their Affiliates or any of their respective officers, directors,
employees, counsel, agents, investment bankers, or accountants may now possess
or may hereafter create or obtain relating to the financial condition, results
of operations, business, properties, assets, liabilities, or future prospects of
the Company, the Parent or Sub or any customer or supplier of any of them shall
not be published, disclosed, or made accessible by any of them to any other
Person at any time or used by any of them except pending the Closing in the
business and for the benefit of the Company, in each case without the prior
written consent of the Parent; provided, however, that the restrictions of this
sentence shall not apply (a) after this Merger Agreement is terminated, but only
to the extent such confidential information relates to the financial condition,
results of operations, business, properties, assets, liabilities, or future
prospects of the Company, of any affiliate of any of them, or any customer or
supplier of any of them, (b) to disclosure to existing or prospective lenders or
other investors or to others whose consent may be required or desirable in
connection with obtaining the consents which are required or desirable to
consummate the transactions contemplated by this Merger Agreement, (c) as may
otherwise be required by law, (d) as may be necessary or appropriate in
connection with the enforcement of this Merger Agreement, or (e) to the extent
such information shall have otherwise become publicly available not in violation
of the provisions of this Merger Agreement. Castle further agrees that it shall
not disclose the existence of or the terms and provisions of the Joinder and
Guaranty attached to this Merger Agreement to any other Person without the prior
written consent of Parent, except that the foregoing shall not apply to any
disclosure which a party may make to any Governmental Entity or as required by
Law.
Section 7.4 Insurance. Castle shall use its commercially reasonable
efforts to maintain in effect until the Closing Date insurance covering the
Company, of the types and in the approximate amounts in effect at the date of
this Merger Agreement, and shall notify the Parent if Castle receives written
notice that any such policy has been cancelled or has lapsed.
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VIII. COVENANTS OF THE PARENT AND SUB
The Parent and Sub covenant and agree with Castle and the Company as
follows:
Section 8.1 Confidentiality. The Parent and Sub shall use their
commercially reasonable efforts to insure that all confidential information
which the Parent, its Affiliates or any of their respective officers, directors,
employees, counsel, agents, investment bankers or accountants may now possess or
may hereafter create or obtain relating to the financial condition, results of
operations, business, properties, assets, liabilities or future prospects of the
Company or any customer or supplier of any of them shall not be published,
disclosed or made accessible by any of them to any other Person at any time or
used by any of them except pending the Closing in the business and for the
benefit of the Company, in each case without the prior written consent of the
Company and Castle; provided, however, that the restrictions of this sentence
shall not apply (a) after the Closing, (b) to disclosure to (i) existing or
prospective lenders, (ii) other investors, or (iii) to others whose consent may
be required or desirable in connection with obtaining the financing or consents
which are required or desirable to consummate the transactions contemplated by
this Merger Agreement, (c) as may otherwise be required by law, (d) as may be
necessary or appropriate in connection with the enforcement of this Merger
Agreement or (e) to the extent such information shall have otherwise become
publicly available not in violation of the provisions of this Merger Agreement.
Section 8.2 Additional Covenants. Until the earlier of (a) three years
from the Closing Date, or (b) the date on which Parent obtains equity capital of
not less than $15 million to support the proposed refinery operations of Parent
and Sub, Parent and Sub (as the Surviving Corporation) agree as follows: (i)
neither of them shall declare or pay any dividends on, make any other
distributions with respect to or redeem or purchase any shares of their
respective capital stock; (ii) neither of them shall make any loans or otherwise
extend any credit on behalf of any Affiliate, except loans and extensions of
credit from Parent to Sub; (iii) neither of them shall enter into any other
agreement or engage in any other transaction with an Affiliate which is less
favorable to Parent or Sub than would be available from a third-party on an arms
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length basis; (iv) neither of them shall sell or otherwise dispose of any real
estate, equipment or other assets which are necessary or useful in a material
way in connection with the proposed operations of the Refinery, except in
accordance with Section 8.3; (v) each of them will use any insurance proceeds
received from the settlement of Environmental Claims and violations of
Environmental Laws for the payment and discharge (or establishment of segregated
cash deposits to assure future payment and discharge) of Liabilities of Sub in
connection with such Environmental Claims and violations of Environmental Laws
provided that any proceeds of insurance in excess of the estimated claims
related thereto may be used as provided in subparagraphs (A) and (C) of clause
(vi) below; (vi) Parent will use the sum of approximately $5 million of initial
capital contributed and to be contributed pursuant to the payment of the Hodapp
Note, if applicable, and the Subscription by its shareholders or otherwise
solely for the purpose of (A), provided Parent and Sub are able to reach
agreement with Kenyen Projects Limited or are otherwise able to acquire
equipment, machinery and other assets necessary to restart the Refinery,
preparing to restart the Refinery and re-establish the refinery business to be
conducted in connection with the Refinery, (B) payment of reasonable expenses
incurred in connection with the foregoing, including without limitation expenses
incurred in connection with the Merger, (C) payment of Liabilities of the
Company, including Liabilities related to Environmental Claims and (D) payment
of expenses to develop a reserve and marketing program; and (vii) each of them
shall cause the equipment and other assets acquired pursuant to the Merger to be
insured at all times by financially sound and reputable insurers against such
hazards as are usually insured against by business entities of established
reputation engaged in like businesses and similarly situated and pay all
premiums on the policies for all such insurance when and as they become due.
Section 8.3 Outside Management.
(a) In the event Parent does not reach agreement with Kenyen Projects
Limited or otherwise acquire equipment, machinery and assets as contemplated by
Section 8.2(vi) hereof and obtain binding commitments for equity financing in a
minimum amount of $15 million (the "Financing") by October 1, 1996, and
accordingly has not restarted the Refinery, Parent shall use its best efforts to
enter into an agreement with Richard Hansen, or his nominee ("Hansen") on terms
mutually acceptable to Parent, Sub and Hansen whereby Hansen will participate in
the management and control of the ongoing operations of Sub and during this
period Hansen shall have the authority to cause the Sub to sell assets and to
use the proceeds from the sale of such assets and other funds available to Sub
and Parent first for paying or otherwise providing for the discharge of
Liabilities of the Sub for Environmental Claims, with any balance to be used as
Parent and Sub shall determine in their sole discretion.
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(b) In the event that prior to October 1, 1996 Parent or Sub wishes to
dispose of assets of Sub which are necessary or useful in a material way for the
operation of the Refinery, Parent shall obtain the prior written approval of
Hansen or his nominee to such disposition of assets.
(c) The parties understand and agree that the agreement with Hansen
will require provisions acceptable to Hansen regarding compensation and
insulation from liabilities of Parent and/or Sub.
(d) If Parent is unable to obtain the Financing and is also unable to
enter into an agreement with Hansen, and Parent and Sub determine to liquidate
and sell the assets acquired from the Company in the Merger, Parent and Sub
shall use their best efforts to sell such assets for the maximum available price
and will use the net proceeds received from such sales to pay or otherwise
satisfy and discharge all obligations of Sub with respect to Environmental
Claims, with any balance to be used as Parent and Sub shall determine in their
sole discretion.
Section 8.4 Subscription. Parent shall not modify or release the
Subscription and shall enforce the terms thereof, and use its best efforts to
collect all monies due thereunder.
Section 8.5 Prior Asset Sale. Parent and Sub acknowledge that the
Company has previously sold substantially all of the equipment and machinery and
certain related assets necessary for the operation of the Refinery pursuant to
the terms and conditions of the Asset Agreement and a related Agreement and
Security Agreement, each of which is dated as of September 29, 1995 and is
between the Company and Kenyen Projects Limited. True, correct and complete
copies of the foregoing have been delivered by the Company to Parent and Sub.
Parent and Sub further acknowledge that the Company has certain ongoing
obligations under such agreements. Pursuant to Section 17.4 of the Asset
Agreement, the Surviving Corporation shall, as of the Effective Time, assume
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any such obligations of the Company, and the Parent covenants to cause the
Surviving Corporation to take all such action as is necessary to perform such
obligations, and Parent shall not take or omit to take any action the effect of
which is to prevent or inhibit the Surviving Corporation's ability to perform
any such obligations. Parent and Sub agree that Kenyen Projects Limited is an
intended third party beneficiary of the terms of this Section 8.5 and shall be
entitled to enforce its rights hereunder directly against Parent and the
Surviving Corporation. Parent and Sub acknowledge and agree that the Company's
treatment of the transactions consummated pursuant to the Asset Agreement for
Federal income tax purposes as a sale of the assets specified therein for
consideration consisting of the Kenyen Note and the other consideration
specified in the Asset Agreement is proper and that neither Parent nor Sub will
take or permit to be taken any action inconsistent with the Company's treatment
of the transaction consummated pursuant to the Asset Agreement as such a sale of
assets in the Federal income Tax Return of the Consolidated Group for the fiscal
year ended September 30, 1995.
Section 8.6 Legal Fees. Parent and Sub further acknowledge the
Company's obligations for legal fees and expenses owing to Jenner & Block for
services rendered to the Company, which fees and expenses were approximately
$330,000 as of December 1, 1995. Parent agrees to cause the Surviving
Corporation to pay all such fees and expenses on or before December 15, 1996, of
which at least $125,000 shall be paid on or before June 30, 1996.
Section 8.7 Cooperation in Arbitration. Parent shall cause the
Surviving Corporation to provide to Castle such assistance as Castle shall
reasonably request in connection with the Arbitration, which assistance shall
include without limitation making available to Castle the individuals who served
as officers or employees of the Company during any periods covered by or
relevant to the Arbitration and providing access to all documents, records and
other information of the Company with respect to the matters related to the
Arbitration. Castle shall reimburse Parent or the Surviving Corporation for
reasonable out-of-pocket expenses actually incurred in connection with
furnishing such assistance to Castle.
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IX. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB
The obligations of the Parent and Sub to effect the Merger are subject
to the fulfillment at or prior to the Closing of each of the following
conditions, unless waived in writing by the Parent.
Section 9.1 Truth of Representations and Warranties. The
representations and warranties made by the Company and Castle in this Merger
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made or given on and as of such date.
Section 9.2 Compliance with Covenants. The Company and Castle shall
have performed and complied in all material respects with all of its respective
covenants and obligations under this Merger Agreement which are to be performed
or complied with by it prior to or at the Closing.
Section 9.3 Absence of Suit. No action, suit, proceeding, or
investigation shall have been commenced or threatened by any Person against the
Parent, Sub, the Company, Castle or any of their respective officers, directors,
or Affiliates seeking to modify in any material respect, or to restrain or
prevent, and no Law shall have been enacted, issued or promulgated which has the
effect of modifying in any material respect or restraining or preventing, the
Merger or questioning the validity or legality of the Merger or the ability of
the Company to restart the Refinery.
Section 9.4 Proceedings and Instruments Satisfactory; Certificates.
All proceedings, corporate or otherwise, to be taken by the Company in
connection with the Merger shall have occurred and all certificates and other
documents reasonably incident thereto as the Parent may reasonably request shall
have been delivered to the Parent.
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Section 9.5 Intercompany Indebtedness. At Closing, Castle shall have
executed and delivered to the Company a release and discharge of all Liabilities
of the Company to Castle or any affiliate of Castle existing prior to Closing,
including any obligation of the Company to pay or reimburse Castle for any
claims arising out of the arbitration proceeding involving Metallgesellschaft
Corp. and/or one of its Affiliates ("MG") (the "Arbitration"). To the extent
that MG is successful in the Arbitration proceeding, a promissory note in the
principal sum of $10 million payable by MG to Castle (previously pledged by
Castle to MG to provide security to MG in the event it is successful in the
Arbitration) is reduced, but Castle shall have no claim against the Company as a
result of such reduction. To the extent that Castle is successful in the
Arbitration proceeding, all net proceeds received by Castle in such Arbitration,
after deducting all fees and expenses of whatsoever nature incurred by Castle or
any of its Affiliates as a result of or related to the Arbitration, shall be
payable to the Surviving Corporation as and only to the extent that such net
proceeds exceed $10 million. Castle shall have the exclusive right to conduct
and control the Arbitration, and Sub and Parent shall cooperate in the conduct
of such proceeding, including without limitation making available at their
expense witnesses and books and records. Castle has included or will include in
the consolidated Federal income Tax Return filed by the Consolidated Group
(including the Company) all income, if any, resulting from any payments made by
MG related to the Arbitration (approximately $10 million) for the periods up to
and including the Effective Time.
Section 9.6 Deliveries at Closing. All documents and instruments
required to be delivered by Castle and the Company at the Closing shall have
been delivered to the Parent as provided in Section 12.2.
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X. CONDITIONS TO OBLIGATIONS OF THE COMPANY, THE SHAREHOLDER AND
CASTLE
The obligations of the Company, the Shareholder and Castle to be
performed hereunder shall be subject to the satisfaction prior to or at the
Closing of the following conditions unless waived in writing by Castle, the
Shareholder and the Company.
Section 10.1 Truth of Representations and Warranties. The
representations and warranties of the Parent and Sub in this Merger Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
or given on and as of such date.
Section 10.2 Compliance with Covenants. The Parent and the Sub shall
have performed and complied in all material respects with all of their
respective covenants and obligations under this Merger Agreement which are to be
performed or complied with by the Parent or Sub prior to or at the Closing.
Section 10.3 Absence of Suit. No action, suit, proceeding or
investigation shall have been commenced or threatened by any Person against the
Parent, Sub, the Company, the Shareholder, Castle or any of their respective
officers, directors or Affiliates seeking to modify in any material respect, or
to restrain or prevent, and no Law shall have been enacted, issued or
promulgated which has the effect of modifying in any material respect or of
restraining or preventing, the Merger or questioning the validity or legality of
the Merger.
Section 10.4 Proceedings and Instruments Satisfactory; Certificates.
All proceedings, corporate or otherwise, to be taken by the Parent or Sub in
connection with the Merger shall have occurred and all certificates and other
documents reasonably incident thereto as Castle or the Company may reasonably
request shall have been delivered to Castle and the Company.
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Section 10.5 Waivers, Releases, and Resignations. Castle shall have
received an agreement, in form and substance acceptable to Castle, executed by
each individual who is an employee, officer, or director of Castle or its
Affiliates and who is or is anticipated to become an officer, director, or
stockholder of the Parent, Sub or any of their respective Affiliates, agreeing,
as of the Closing, (a) to waive and release (i) any payments which may be or
become due to such individual as a result of this Merger Agreement or the
consummation of the Merger and (ii) such other rights as Castle may reasonably
request and (b) to resign as an officer and director of Castle or its
Affiliates.
Section 10.6 Deliveries at Closing. All documents and instruments
required to be delivered by the Parent and Sub at the Closing shall have been
delivered to Castle or the Company as provided in Section 12.3.
Section 10.7 Intercompany Indebtedness. At Closing, the Company shall
have executed and delivered to Castle a release and discharge of all Liabilities
of Castle or any Affiliate of Castle to the Company existing prior to the
Closing.
Section 10.8 Tax Clearance Certificate. The Company shall have
obtained a tax clearance certificate from the California Franchise Tax Board.
Section 10.9 Subscription. The Parent shall have received the
Subscription, satisfactory in form and substance to Castle and the Company.
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XI. INDEMNIFICATION
Section 11.1 Requirement of Indemnification. (a) Castle shall defend,
indemnify and hold the Parent Indemnitees harmless from and against any Damages
suffered by them resulting from, arising out of or incurred with respect to, or
(in the case of claims asserted against any Parent Indemnitee by a third party)
alleged to result from, arise out of or have been incurred with respect to (i)
the falsity, breach or inaccuracy of any of the warranties, representations,
covenants or agreements of Castle and/or Shareholder contained in this Merger
Agreement or in any schedule, exhibit, document or instrument delivered in
connection herewith, (ii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses relating to Federal Tax
liability of Castle, any Affiliate of Castle or other person or entity which
arises by reason of the Company having been joined in the filing of consolidated
Federal income Tax returns by the Consolidated Group, (iii) any and all claims
against the Company arising out of or in connection with the Arbitration
(exclusive of claims for Taxes) and (iv) any and all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including, without limitation, legal fees and expenses, incurred in enforcing
this indemnity.
(b) The Parent shall indemnify and hold the Castle Indemnitees
harmless from and against any Damages suffered by them resulting from, arising
out of or incurred with respect to, or (in the case of claims asserted against
any Castle Indemnitee by a third party) alleged to result from, arise out of or
have been incurred with respect to (i) the falsity, breach or inaccuracy of any
representation, warranty, covenant or agreement of the Parent or Sub contained
in this Merger Agreement or in any schedule, exhibit, document or instrument
delivered in connection herewith, (ii) any and all actions, suits, proceedings,
claims, demands, assessments, judgments, costs and expenses brought or asserted
by Kenyen Projects Limited, any affiliate of Kenyen Projects Limited or any
other person or entity claiming by, through or under any of the foregoing
respecting or involving (A) the Company, (B) the Assets of the Company or (C)
the transactions contemplated by the Asset Agreement or this Merger Agreement,
(iii) any Environmental Claims, including without limitation any Environmental
Claims alleging Liability of the Company, (iv) any Liability whatsoever of the
Parent, Sub or the Company which are not specifically subject to indemnification
under Section 11.1(a) above, whether arising prior to, on or after the Closing
Date, including without limitation, any Liability arising out of the Parent's
conduct of the business of the Company as the Surviving Corporation on or after
the Closing and (v) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including without limitation legal
fees and expenses, incurred in enforcing this indemnity.
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<PAGE>
Section 11.2 Procedures Relating to Indemnification. (a) A party (the
"indemnified party") seeking indemnification under this Merger Agreement in
respect of, arising out of or involving a claim or demand made by any Person
against the indemnified party (a "Third Party Claim") shall notify the
indemnifying party in writing of the Third Party Claim within 20 days after
receipt by the indemnified party of written notice of the Third Party Claim;
provided, however, that failure to give such notification shall not affect the
indemnification provided under this Merger Agreement, except to the extent the
indemnifying party shall actually have been prejudiced by the failure.
Thereafter, the indemnified party shall deliver to the indemnifying party,
promptly after the indemnified party's receipt thereof, copies of all notices
and documents (including court papers) received by the indemnified party
relating to the Third Party Claim.
(b) The indemnifying party shall have the right, within 30 days after
being so notified, to assume the defense of such Third Party Claim with counsel
reasonably satisfactory to the indemnified party. In any such proceeding, the
defense of which the indemnifying party shall have so assumed, the indemnified
party shall have the right to participate therein and retain its own counsel at
its own expense unless (i) the indemnified party and the indemnifying party
shall have mutually agreed to the retention of such counsel, (ii) the
indemnified party shall have received a written opinion of counsel to the effect
that there may be one or more legal defenses available to it which are different
from or additional to those available to the indemnifying party (iii) the named
parties to any such proceeding (including the impleaded parties) include both
the indemnifying party and the indemnified party, and representation of both
parties by the same counsel would be inappropriate in the opinion of the
indemnified party's counsel due to actual or potential differing interests
between them; in any such case, such separate counsel may be retained by the
indemnified party at the indemnifying party's expense (provided that the
indemnifying party shall not be required to bear the fees and expenses of more
than one such counsel). To the extent that the settlement of such a Third Party
Claim, the defense of which has been assumed by the indemnifying party, involves
the payment of money only, the indemnifying party shall have the right, in
consultation with the indemnified party, to settle those aspects dealing only
with the payment of money, provided that the indemnifying party pays such money.
In connection with any such defense or settlement, the indemnifying party shall
not enter into a consent decree involving injunctive or non-monetary relief or
consent to an injunction without the indemnified party's prior written consent.
If the indemnifying party shall have assumed the defense of a Third Party Claim,
the indemnified party shall not, without first waiving the indemnity as to such
claim, admit any liability with respect to, or settle, compromise or discharge,
the Third Party Claim without the indemnifying party's prior written consent.
29
<PAGE>
(c) With respect to all Third Party Claims, the indemnified party
shall cooperate in all reasonable respects with the indemnifying party in
connection with such claims and the defense or compromise of the claims. Such
cooperation shall include the retention and (upon the indemnifying party's
request) the provision to the indemnifying party of records and information
reasonably relevant to the Third Party Claim, making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided under this Merger Agreement.
Section 11.3 Defense of Third-Party Claim. The failure by the
indemnifying party to notify the indemnified party of its election to defend any
Third Party Claim within 30 days after written notice thereof shall have been
given to the indemnifying party shall be deemed a waiver by the indemnifying
party of its right to defend such Third Party Claim. If the indemnifying party
shall not assume the defense of any such Third Party Claim, the indemnified
party may defend against and, subject to obtaining the consent of the
indemnifying party, which shall not be unreasonably delayed or denied, settle
such Third Party Claim in such manner as it may deem appropriate.
Section 11.4 Payment. The indemnifying party shall pay directly all
Damages or shall, if the indemnified party elects to pay any Damages directly,
promptly reimburse the indemnified party for any Damages paid by the indemnified
party that is the subject of an indemnification given under this Article XI. The
indemnifying party shall reimburse the indemnified party promptly upon demand
for the amount of any judgment rendered or settlement entered into with respect
to any Third Party Claim, the defense of which was not assumed by the
indemnifying party, and, promptly upon demand, for all Damages paid by the
indemnified party in connection with the defense against such Third Party Claim.
30
<PAGE>
XII. CLOSING
Section 12.1 Time and Place. The Closing of the Transactions shall
take place at the offices of Duane, Morris & Heckscher, One Liberty Place,
Philadelphia, Pennsylvania 19103 at 3:00 P.M. (Eastern standard time) on January
____, 1996, or at such other date and place as may be agreed upon by the parties
(the "Closing Date").
Section 12.2 Items to be Delivered by Castle and the Company. At the
Closing, Castle, the Shareholder and the Company shall deliver in accordance
with this Merger Agreement, among other things, the following:
(a) Certificates representing the Company Common Stock for surrender
pursuant to Section 3.2 hereof.
(b) A certificate, signed by an officer of each of Castle, the
Shareholder and the Company, stating that the representations and warranties
made by Castle, the Shareholder and the Company in this Merger Agreement are
true and correct in all material respects on and as of the Closing Date with the
same effect as though such representations and warranties had been made on or
given on and as of the Closing Date, that each of Castle, the Shareholder and
the Company has in all material respects performed and complied with all of its
respective obligations under this Merger Agreement which are to be performed or
complied with by it prior to or on the Closing Date and that to the Knowledge of
each of Castle, the Shareholder and the Company all conditions to the
obligations of the Parent and Sub to be performed hereunder have been satisfied
or waived. The delivery of such certificate shall be and constitute a
representation and warranty of each of Castle, the Shareholder and the Company
as of the Closing Date to each of the facts stated therein.
(c) A written opinion or opinions of counsel for each of Castle, the
Shareholder and the Company, dated as of the Closing Date, addressed and
reasonably satisfactory to the Parent, covering the following matters:
(i) the corporate existence and good standing of Castle, the
Shareholder and the Company;
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<PAGE>
(ii) the due authorization, execution and delivery by Castle, the
Shareholder and the Company of this Merger Agreement and the legal, valid and
binding effect of Castle's, the Shareholder's and the Company's obligations
hereunder enforceable in accordance with the terms hereof, except as may be
limited by Laws affecting bankruptcy, insolvency, fraudulent conveyance and
creditors' rights generally and subject to equitable principles and the
discretion of a court to grant equitable remedies; and
(iii) that the execution and delivery of this Merger Agreement do not,
and the consummation of the Merger will not, violate any provision of the
organizational documents of Castle, the Shareholder or the Company.
(d) A certified copy of the duly adopted resolutions of the Board of
Directors of the Company and the Shareholder authorizing and recommending the
Merger.
(e) The Short Form Agreement.
(f) Such other documents, instruments or certificates as the Parent
may reasonably request.
Section 12.3 Items to be Delivered by Parent and Sub. At the Closing,
the Parent and Sub shall deliver, among other things:
(a) A certificate, signed by an officer of each of the Parent and Sub,
stating that the representations and warranties made by each of the Parent and
Sub in this Merger Agreement are true and correct in all material respects on
and as of the Closing Date with the same effect as though such representations
and warranties had been made on or given on and as of the Closing Date, that
each of the Parent and Sub has in all material respects performed and complied
with all of its respective obligations under this Merger Agreement which are to
be performed or complied with by it prior to or on the Closing Date and that to
the Knowledge of each of the Parent and Sub all conditions to the obligations of
Castle and the Company to be performed hereunder have been satisfied or waived.
The delivery of such certificate shall be and constitute a representation and
warranty of each of the Parent and Sub as of the Closing Date to each of the
facts stated therein.
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(b) A written opinion of counsel for the Parent and Sub, dated as of
the Closing Date, addressed and reasonably satisfactory to the Company and
Castle covering the following matters:
(i) the corporate existence, good standing and qualification of each
of the Parent and Sub;
(ii) the due authorization, execution and delivery by Parent and Sub
of this Merger Agreement and the legal, valid and binding effect of each of the
Parent's and Sub's respective obligations hereunder in accordance with the terms
hereof, except as may be limited by Laws affecting bankruptcy, insolvency,
fraudulent conveyance and creditors' rights generally and subject to the
discretion of a court to grant equitable remedies; and
(iii) that the execution and delivery of this Merger Agreement do not,
and the consummation of the Merger will not, violate any provision of the
certificate of incorporation or bylaws of either the Parent or Sub.
(c) A certified copy of the duly adopted resolutions of the Parent's
and the Sub's Board of Directors authorizing the Merger.
(d) The Short Form Agreement.
(e) The Subscription.
(f) Evidence that the sum of $1 million in cash has been received by
Parent.
(g) Evidence that the Parent has received either (1) the Hodapp Note,
secured by a pledge of marketable securities with a fair market value not less
than $2 million, with the form and substance of the Hodapp Note and such pledge
agreement having been determined to be acceptable to Castle and its counsel, or
(2) such other assets with a fair market value of at least $2 million as
contemplated by Section 5.7(a) hereof.
(h) Such other documents, instruments, and certificates as Castle or
the Company may reasonably request.
33
<PAGE>
XIII. TERMINATION
Section 13.1 Termination. This Merger Agreement may be terminated and
the Merger abandoned at any time prior to the Closing Date:
(a) by mutual consent of Castle, the Company and the Parent;
(b) by the Parent, if within 20 calendar days of the date of this
Agreement, or any later date to which the Closing is extended as provided in
Section 12.1 hereof, any of the conditions provided in Article IX of this Merger
Agreement have not been met and have not been waived in writing by the Parent,
except as a result of the willful acts or omissions of the Parent; or
(c) by Castle, if within 20 calendar days of the date of this
Agreement, or any later date to which the Closing is extended as provided in
Section 12.1 hereof, any of the conditions provided in Article X of this Merger
Agreement have not been met and have not been waived in writing by Castle,
except as a result of the willful acts or omissions of Castle.
Section 13.2 Survival after Termination. The obligations contained in
Sections 7.4, 8.1, 15.2, and 15.9 hereof shall survive any termination of this
Merger Agreement.
XIV. AMENDMENT AND WAIVER
Section 14.1 Amendment. This Merger Agreement may be amended or
modified in whole or in part at any time by an agreement in writing executed in
the same manner as this Merger Agreement.
Section 14.2 Extension; Waiver. At any time prior to the Closing Date,
Castle or the Parent may:
(a) extend the time for the performance of any of the obligations or
other acts of the other,
(b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or
34
<PAGE>
(c) waive compliance with any of the agreements or conditions
contained herein.
Any agreement on the part of a party to any such extension or waiver shall be
valid only if set forth in an instrument in writing duly executed and delivered
on behalf of such party. The failure of any party hereto to enforce at any time
any provision of this Merger Agreement shall not be construed to be a waiver of
such provision, nor in any way to affect the validity of this Merger Agreement
or any part hereof or the right of such party hereafter to enforce each and
every such provision. No waiver of any breach of this Merger Agreement shall be
held to constitute a waiver of any other or subsequent breach.
XV. MISCELLANEOUS
Section 15.1 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, sent by Federal Express, Express Mail or similar
overnight delivery or courier service, or delivered (in person or by telecopy,
telex or similar communications equipment) against receipt to the party to whom
it is given, addressed as follows:
if to Castle, the Shareholder or the Company to:
Castle Energy Corporation
One Radnor Corporate Center
Suite 250
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Joseph L. Castle, II, Chairman
Telecopy No: (610) 995-0409
with a copy to:
Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-7396
Attention: Thomas G. Spencer, Esquire
35
<PAGE>
Telecopy No.: (215) 979-1020
if to the Parent or Sub:
Energy Merchant Corp.
c/o PMG Capital Corp.
General Motors Building
767 Fifth Avenue, 23rd Floor
New York, NY 10153
Attention: Siegfried Hodapp, President
with a copy to:
PMG Capital Corp.
General Motors Building
767 Fifth Avenue, 23rd Floor
New York, NY 10153
Attention: Vincent Papa, Esquire
and
Loeb & Loeb LLP
1000 Wilshire Blvd.
Suite 1800
Los Angeles, CA 90017-2475
Attention: Robert S. Barry, Jr., Esquire
or to such other address as the Person to whom notice is given may have
previously furnished to the other party in writing in accordance herewith.
Section 15.2 Expenses. Each party shall bear its own expenses in
connection with this Merger Agreement and the Merger.
Section 15.3 Governing Law. This Merger Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to its rules on conflicts of law.
Section 15.4 Successors and Assigns. This Merger Agreement shall not
be assigned by any party without the written consent of all other parties and
any attempted assignment without such written consent shall be null and void and
without legal effect. This Merger Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns and shall inure to the benefit of the Persons entitled to indemnity
under Article XI.
36
<PAGE>
Section 15.5 Partial Invalidity. In case any one or more of the
provisions contained herein shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Merger Agreement,
but this Merger Agreement shall be construed as if such invalid, illegal or
unenforceable provision or provisions had never been contained herein unless the
deletion of such provision or provisions would result in such a material change
as to cause completion of the Merger to be unreasonable or would materially and
adversely frustrate the objectives of the parties as expressed in this Merger
Agreement.
Section 15.6 Execution in Counterparts. This Merger Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement, and shall become a binding agreement when one or more
counterparts have been signed by each of the parties and delivered to each of
the other parties.
Section 15.7 Titles and Headings. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Merger Agreement.
Section 15.8 Entire Agreement. This Merger Agreement, together with
all schedules and exhibits hereto and any documents delivered pursuant to this
Merger Agreement, contains the entire understanding of the parties hereto with
regard to the subject matter contained herein.
Section 15.9 Announcements. Announcements to the public, employees,
customers or suppliers concerning the Merger by Castle or the Parent shall be
subject to the approval of the other parties in all essential respects, except
that the approval by the other parties shall not be required as to any
statements and other information which a party may submit to any Governmental
Entity or pursuant to any Law.
37
<PAGE>
Section 15.10 Construction. The parties acknowledge that all parties
and their counsel have participated fully in the negotiation and preparation of
this Merger Agreement and agree that, in any construction or interpretation of
this Merger Agreement, no provision shall be construed against the interest of
any party on the basis that such party drafted such provision.
Section 15.11 Jurisdiction. Any action, suit or proceeding arising out
of, based on or in connection with this Merger Agreement or the Merger may be
brought only in any United States District Court or appropriate state court in
the State of California and each party covenants and agrees not to assert, by
way of motion, as a defense or otherwise, in any such action, suit or
proceeding, any claim that it is not subject personally to the jurisdiction of
such court, that its property is exempt or immune from attachment or execution,
that the action, suit or proceeding is brought in an inconvenient forum, that
the venue of the action, suit or proceeding is improper, or that this Merger
Agreement or the subject matter hereof may not be enforced in or by such court.
Section 15.12 Further Actions. At any time and from time to time, each
party hereto agrees, without further consideration, to take such actions and to
execute and deliver such documents as may be reasonably necessary to effectuate
the purposes of this Merger Agreement and to more effectively carry out the
transfer contemplated by this Merger Agreement.
Section 15.13 Cancellation of Insurance Policies. The Parent
acknowledges and understands that Castle maintains insurance coverage for the
Company under blanket policies which will automatically cancel upon the
completion of the Merger. The Parent further acknowledges that Castle shall be
entitled to receive and retain any refund of premium or similar payment or
reimbursement from any insurer with respect to any policies that are so
canceled.
38
<PAGE>
Section 15.14 No Third Party Beneficiaries. Except as set forth in
Section 8.5 hereof, nothing in this Agreement shall create any rights in favor
of or confer any benefits upon any person or entity other than the parties
hereto and, to the extent herein permitted, their successors and assigns, and no
such other person or entity shall have any rights hereunder as a third-party
beneficiary or otherwise.
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be duly executed as of the date and year first above written.
CASTLE ENERGY CORPORATION
By: /s/ Joseph L. Castle II
-----------------------------------------------
Title: Chairman and Chief Executive Officer
POWERINE HOLDING CORP.
By: /s/ A.L. Gualtieri
-----------------------------------------------
Title: Chairman, President and Chief Executive Officer
ENERGY MERCHANT CORP.
By: /s/ Siegfried K. Hodapp
-----------------------------------------------
Title:
POWERINE OIL COMPANY
By: /s/ A.L. Gualtieri
-----------------------------------------------
A.L. Gualtieri, President
POC ACQUISITION CORPORATION
By: /s/ A.L. Gualtieri
-----------------------------------------------
Title: President
40
<PAGE>
CASTLE
ENERGY LOGO
CORPORATION
JOSEPH L. CASTLE II
Chairman and Chief Executive Officer
January 3, 1996
Mr. William S. Sudhaus
606 Pugh Road
Strafford, PA 19087
Re: Severance Payment and Release
Dear Bill:
This letter agreement (this "Letter"), including Exhibit A
hereto, sets forth the terms of your resignation from Castle Energy
Corp.("Castle") and its subsidiaries. Capitalized terms not otherwise defined
herein have the meanings ascribed to them in that certain Employment Agreement
dated as of January 1, 1994 among Castle, Indian Refining & Marketing Inc. (now
known as Indian Refining & Marketing I Inc.), Powerine Oil Company, Indian
Refining Limited Partnership (now known as Indian Refining I Limited
Partnership) and you (as amended, the "Employment Agreement").
As of January 1, 1996, you are voluntarily resigning from your
employment and from any and all offices, directorships and other positions you
currently hold with Castle, its direct or indirect subsidiaries, divisions,
affiliates and related companies or entities, regardless of its or their form of
business organization (collectively, the "Castle Group"). Notwithstanding the
foregoing, you shall retain your Castle board seat and shall be entitled to
serve as an independent director until your current term expires. In
consideration for your surrender to Castle of your Castle Stock Appreciation
Rights (hereinafter defined) and your agreement to defer payment of compensation
due to you pursuant to the Employment Agreement, you will receive the severance
package detailed in Exhibit A (the "Severance Package").
You hereby acknowledge that, except as otherwise contemplated
herein, the receipt of the Severance Package is in full and complete
satisfaction of any and all liabilities or obligations the Castle Group has or
may have to you and/or your spouse.
One Radnor Corporate Center--Suite 250, 100 Matsonford Road, Radnor, PA 19087
610-995-9400 -- Fax: 610-995-0409
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 2
Except as set forth in this paragraph, you hereby release and
discharge the Castle Group and its officers, directors,employees, agents,
representatives and successors (collectively, the "Company Parties") from any
and all claims, liabilities, demands, actions, and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit known or
unknown, fixed or contingent that you may have or claim to have against the
Company Parties, or any of them, and do hereby covenant not to file a lawsuit or
participate in any class action lawsuit to assert such claims. This release and
waiver, includes, but is not limited to, claims arising out of or in connection
with (I) your business relationship with any of the Company Parties; (ii) any
injury you incurred during the term of your employment; (iii) any allegation
that any of the Company Parties wrongfully or unlawfully terminated, discharged
or laid you off; and (iv) any allegation of violation of Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, breach of contract, or any other statutory and common law
cause of action; provided that this release is limited to the extent of any
applicable law limiting the scope of a release of this type and does not release
performance under this Letter, your rights under your 401K and pension plans or
any of the obligations under any other agreements, including, without
limitation, provisions of the Employment Agreement, which survive the
termination of such Employment Agreement, and the Stock and Asset Purchase
Agreement dated as of May 5, 1995, as amended, (the "Purchase Agreement").
Further, you acknowledge that you have had a period in excess
of twenty-one (21) days to consider the terms of this Letter.
Further, you hereby agree not to disparage, publicly or
privately, any of the Company Parties, and agree that you will allow Castle
reasonable opportunity to review any press releases, announcements, governmental
filings and the like being issued or filed by you and involving any of the
Company Parties, prior to such issuance or filing.
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 3
Further,as part of this Letter, you hereby agree to surrender
all stock appreciation and/or bonus payment rights that you own issued by the
Castle Group ("Stock Appreciation Rights").
Finally, you agree to make yourself available at times and
places reasonably convenient to you for up to sixteen (16) hours per month
during the period that the Deferred Amount (as defined in Exhibit A hereto)
remains outstanding to consult with respect to litigation and related matters
involving the Castle Group. Your reasonable expenses in connection with such
consulting will be paid by Castle. After the Deferred Amount has been paid, you
agree to make yourself available on reasonable notice on the same terms as
described above except that in addition you shall be paid fifteen hundred
dollars ($1500) for each eight hour day or part thereof that you make yourself
available at Castle's request.
Castle, hereby represents and warrants that it is authorized
and empowered to, and does hereby on behalf of the Company Parties, jointly and
severally, release and discharge you and all of your affiliates from any and all
claims, liabilities, demands, actions, and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit known or
unknown, fixed or contingent that any of them may have or claim to have against
you and the Company Parties do hereby covenant not to file a lawsuit or
participate in any class action lawsuit to assert such claims; provided that
this release is limited to the extent of any applicable law limiting the scope
of a release of this type and does not release performance under this Letter and
under any agreements, including without limitation the Confidential Information
provision in Section 7 of the Employment Agreement, which are incorporated into
this Letter by its terms.
Further, the Company Parties, jointly and severally, hereby
agree not to disparage you, publicly or privately, and agree to allow you
reasonable opportunity to review any press releases, announcements, governmental
filings and the like issued or filed by any of the Company Parties and involving
you or any of your affiliates, prior to such issuance or filing.
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 4
Castle hereby guarantees the performance of the Company
Parties hereunder and agrees to indemnify you for any damages, cost, or expense,
including reasonable attorneys fees, you incur from any failure by any Castle
Party to perform its obligations under this Agreement.
The members of the Castle Group, jointly and severally, agree
(a) to continue indefinitely hereafter to indemnify, defend, reimburse and hold
you harmless, to the same extent, and under the same terms, as you are currently
indemnified under any contractual arrangement (including, without limitation,
this Letter, the Employment Agreement and the Purchase Agreement) or under any
charter, articles or certificate of incorporation, by-laws or partnership
agreement of any Castle Group member, and (b) except as specifically precluded
by applicable Delaware law, to pay promptly on your behalf and on an ongoing
basis, for any out-of-pocket costs and expenses incurred by you at any time
hereafter (including reasonable attorneys fees and expenses) in connection with
any litigation, regulatory proceeding, investigation or other action currently
or at any time hereafter maintained, pursued or initiated and in which any
Castle Group member is or becomes involved.
The Company Parties acknowledge and agree that, from and after
the date hereof, (a) you are not restricted by your prior or current
relationships with any of the Company Parties from pursuing and entering into
any business ventures or opportunities whatsoever, in your sole and absolute
discretion, and (b) the terms of Section 7 of the Employment Agreement shall be
deemed not apply to the refining assets and operations of the Castle Group.
Notwithstanding the foregoing, you acknowledge that your obligations as a
director of Castle under Delaware law are not limited by this provision.
This Letter is confidential, except to the extent disclosure
is required by law. None of the Company Parties nor you shall discuss this
Letter, or its terms or the payments to be made hereunder, to any person except
(a) CORE or Castle Group employees who must have knowledge of it as part of
their duties, (b) attorneys of the parties hereto, (c) tax advisors of the
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 5
parties hereto (d) persons or entities with which you are doing or seek to do
business, who agree to keep this Letter confidential and (e) your spouse.
Nothing contained in this Letter may be construed as an
admission by he Company Parties or you of any liability, wrongdoing, or unlawful
conduct.
This Letter shall be binding upon the respective successors,
heirs, assigns, administrators, executors and legal representatives of the
parties. If any provision, section, subsection or other portion of this Letter
shall be determined by any court of competent jurisdiction to be invalid,
illegal or unenforceable, in whole or in part, and such determination shall
become final, such provision or portion shall be deemed to be severed or
limited, but only to the extent required to render the remaining provisions and
portion of this Letter enforceable. This Letter as thus amended shall be
enforced so as to give effect to the intention of the parties insofar as that is
possible. In addition, the parties hereby expressly empower a court of competent
jurisdiction to modify any term or provision of this Letter to the extent
necessary to comply with existing law and to enforce this Letter as modified.
This Letter shall be deemed to have been executed and
delivered within the Commonwealth of Pennsylvania, and the rights and
obligations of the parties shall be construed and enforced in accordance with,
and governed by, the laws of the Commonwealth of Pennsylvania without regard to
the principles of conflict of laws. The parties agree that any dispute relating
to this Letter or your employment and other relationship with the Castle Group
or the termination thereof shall be submitted by the parties to, and decided by,
the state or federal courts in the Eastern District of Pennsylvania.
In the event of litigation in connection with or concerning
the subject matter of this Letter, the prevailing party shall be entitled to
recover all costs and expenses of litigation incurred by it, including such
party's reasonable attorneys' fees. The prevailing party shall also be entitled
to recover in addition to its damages an additional amount equal to 100% of its
damages for the failure of the other party to perform it obligations under this
Letter.
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 6
You acknowledge that Castle has advised you to consult with an
attorney prior to executing this Letter. The Company Parties acknowledge that
they have been advised by experienced counsel, have conducted whatever
investigation they and their counsel deem necessary to assure themselves that
they have no claims against you of which they are not aware, and have assured
themselves that it is prudent and desirable for them to enter into this Letter
with you.
The parties hereto acknowledge that, except as provided in
this Letter, no party (nor any officer, agent, employee, representative, or
attorney for any party) has made any statement or representation to any other
party regarding any fact relied upon in entering into this Letter, and each
party does not rely on any statement, representation or promise of any other
party (or any officer, agent, employee, representative, or attorney for any
party) in executing this Letter, or in making the settlement provided for
herein, except as expressly stated in this Letter.
Each party or responsible officer thereof has read this Letter and
understands the contents thereof. The officer executing this Letter on behalf of
Castle and Indian Refining & Marketing I Inc. is empowered and duly authorized
to do so and hereby binds Castle and the Company Parties.
In entering into this Letter, each party assumes the risk of
any misrepresentation, concealment or mistake. If any party should subsequently
discover that any fact relied upon by him, her or it in entering into this
Letter was untrue or that any fact was concealed from him, her or it, or that
his, her or its understanding of the facts or the law was incorrect, such party
shall not be entitled to any relief in connection therewith including, without
limitation, any alleged right or claim to set aside or rescind this Letter. This
Letter is intended to be and is final and binding between the parties hereto,
regardless of any claims of misrepresentation, promises made without intention
to perform, concealment of fact, mistake of fact or law, or of any other
circumstance whatsoever.
<PAGE>
Mr. William S. Sudhaus
January 3, 1996
Page 7
Each term of this Letter is contractual and not merely a
recital. The parties shall execute all such further and additional documents as
shall be necessary or desirable to carry out the provisions of this Letter.
If the above terms are acceptable to you, please sign and date
the duplicate of this Letter and return it to me. Moreover, by signing this
Letter you affirm as, we have done in signing this Letter, that you have
carefully read this Letter and that you fully understand the meaning and intent
of this Letter and that you have signed it voluntarily and knowingly.
Very truly yours,
INDIAN REFINING & CASTLE ENERGY CORPORATION
MARKETING I Inc. for
itself and as sole general /s/ Joseph L. Castle II
partner of INDIAN REFINING I -------------------------------
LIMITED PARTNERSHIP Joseph L. Castle II
By /s/ Donald L. Marsh Jr.
----------------------
Its SVP
------------
AGREED & ACCEPTED:
/s/ William S. Sudhaus
- ----------------------
William S. Sudhaus
Dated: 1/17/96
----------------
<PAGE>
EXHIBIT A
SEVERANCE PACKAGE
The Castle Group and each member thereof, jointly and
severally, agrees to pay and provide the following Severance Package to William
S. Sudhaus ("Sudhaus"):
1. Castle shall pay Sudhaus cash payments totaling
seven hundred and thirty-nine thousand, nine hundred and ninety-five
dollars ($739,995), subject to applicable tax withholding, in the
following amounts:
(a) Payment of two hundred and forty
thousand dollars ($240,000) payable on January 2,
1996 (the "Initial Payment");
(b) Payment of fifty-five thousand dollars
($55,000) commencing January 31, 1996 and payable
monthly thereafter on the last day of each month until
payments under this paragraph 1 aggregating seven
hundred and thirty-nine thousand, nine hundred and
ninety-five dollars ($739,995), including the Initial
Payment, have been made to Sudhaus (the "Deferred
Amount").
2. Continued life, health and disability insurance
until the Deferred Amount has been paid (at which time Sudhaus will
be eligible for applicable COBRA benefits at Sudhaus' expense), in
accordance with the terms of the Employment Agreement or as otherwise
in existence on September 30, 1995.
3. Reimbursement of all heretofore unreimbursed
expenses up to fifteen thousand dollars ($15,000) incurred by Sudhaus
through December 31, 1995 in accordance with the terms of the
Employment Agreement, notwithstanding termination of the Employment
Agreement, it being acknowledged that no circumstances exist which
would allow such reimbursement not to be paid.
<PAGE>
4. Reimbursement of all expenses incurred prior to
September 30, 1995 by Sudhaus, CORE Refining Corporation and their
affiliates and other applicable parties pursuant to the Purchase
Agreement. Sudhaus agrees to use commercially reasonable efforts to
cooperate with the Castle Group in analyzing and negotiating third
party claims for such expenses.
5. All stock options that would otherwise expire ninety
(90) days after termination of Sudhaus' employment at Castle shall
now expire ninety (90) days after payment of the Deferred Amount.
6. Continued use of his current offices at One
Corporate Center, Radnor, Pennsylvania and secretarial and other
support as currently provided until the Deferred Amount has been
paid. Provided, however, Sudhaus shall pay Castle at a flat rate of
$600 per month for use of the telephone regardless of the actual cost
of such usage.
7. Sudhaus may keep, at no charge, his cellular
telephone and fax machine previously provided by the Castle
Group.
Each of the above-described benefits and payments shall
be paid and provided to Sudhaus by the Castle Group with no offset,
counterclaim or reduction. Sudhaus shall have no duty to mitigate any
payments or benefits made by the Castle Group under the Severance
Package. The fact that Sudhaus obtains other employment or becomes
involved in other business ventures or opportunities shall in no way
affect the Castle Group's obligations hereunder.
The payments described in paragraph 1 hereto shall
become immediately due and payable upon the occurrence of any of the
following conditions:
(1) Any default by the Castle Group in the payment or
provision of the Severance Package described above, which remains
uncured ten (10) days after the provision to Castle of written notice
by Sudhaus specifying the default. For purposes of this Letter,
notice shall be deemed given the same day that such written notice
addressed to Joseph L. Castle II is hand-delivered or sent by
facsimile to Castle's Radnor, Pennsylvania office (or such other
2
<PAGE>
office as Castle shall have previously designated in writing to
Sudhaus as its address for notice). Notice may also be provided by
registered mail, return receipt requested or by Federal Express or
like private carrier, in which case notice shall be deemed given two
business days after the written notice is delivered to the U. S.
Postal Service or to the private carrier.
(2) The sale or exchange by Castle of all or
substantially all of its nonrefining assets, a merger or other
combination between Castle and any entity not a member of the Castle
Group or the adoption of a plan of liquidation by Castle's Board of
Directors.
(3) The sale, exchange, restructuring or other
conveyance of thirty (30) percent or more of the economic value of
the Lone Star Natural Gas Sales Contract to any non-members of the
Castle Group.
(4) The refinancing or repayment of indebtedness
due General Electric Credit Corporation.
(5) The filing of a voluntary or involuntary petition
under the bankruptcy or insolvency laws of the United States or of
any state, the entering into any arrangement of debts outside of
bankruptcy with creditors, or a public declaration of insolvency by
the Board of directors and/or any stockholders of any members of the
Castle Group, except Indian Refining and Marketing I Inc.
or Powerine Oil Company.
The Castle Group shall allocate the seven hundred and
thirty-nine thousand, nine hundred and ninety-five dollars ($739,995)
paid pursuant to paragraph 1 herein for tax, accounting and all other
purposes as follows:
(a) Compensation-- two hundred and forty thousand
($240,000)
(b) Purchase by Castle of Sudhaus' Stock Appreciation
Rights--four hundred and ninety-nine thousand, nine
hundred and ninety-five ($499,995)
3
<PAGE>
CASTLE
ENERGY LOGO
CORPORATION
JOSEPH L. CASTLE II
Chairman and Chief Executive Officer
January 22, 1996
Mr. David M. Hermes
4023 Colony Oaks Drive
Sugar Land, Texas 77479
Re: Severance Payment and Release
Dear David:
This letter agreement (this "Letter"), including Exhibit A
hereto, sets forth the terms of your resignation from Castle Energy
Corp.("Castle") and its subsidiaries. Capitalized terms not otherwise defined
herein have the meanings ascribed to them in that certain Employment Agreement
dated as of February 12, 1992, as amended, among Indian Refining & Marketing I
Inc., I.P. Oil Company, Powerine Oil Company and Castle Energy Corporation and
you (as amended, the "Employment Agreement").
As of January 17, 1996, you are voluntarily resigning from
your employment and from any and all offices, directorships and other positions
you currently hold with Castle, its direct or indirect subsidiaries, divisions,
affiliates and related companies or entities, regardless of its or their form of
business organization (collectively, the "Castle Group"). In consideration for
your agreement to defer payment of compensation due to you pursuant to the
Employment Agreement, you will receive the severance package detailed in Exhibit
A (the "Severance Package").
You hereby acknowledge that, except as otherwise contemplated
herein, the receipt of the Severance Package is in full and complete
satisfaction of any and all liabilities or obligations the Castle Group has or
may have to you and/or your spouse.
Except as set forth in this paragraph, you hereby release and
discharge the Castle Group and its officers, directors, shareholders, employees,
agents and assigns and successors (collectively, the "Company Parties") from any
and all claims, liabilities, demands, actions, and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit known or
unknown, fixed or contingent that you may have or claim to have against the
Company Parties, or any of them, and do hereby covenant not to file a lawsuit or
participate in any class action lawsuit to assert such claims. This release and
waiver, includes, but is not limited to, claims arising out of or in connection
with (i) your business relationship with any of the Company Parties; (ii) any
One Radnor Corporate Center--Suite 250, 100 Matsonford Road, Radnor, PA 19087
610-995-9400 -- Fax: 610-995-0409
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 2
injury you incurred during the term of your employment except as such is covered
under medical benefits provided by the Castle Group, or the Consolidated Omnibus
Reconciliation Act of 1985 (COBRA), whichever is applicable; (iii) any
allegation that any of the Company Parties wrongfully or unlawfully terminated,
discharged or laid you off; and (iv) any allegation of violation of Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, breach of contract, or any other statutory and
common law cause of action; provided that this release is limited to the extent
of any applicable law limiting the scope of a release of this type and does not
release performance under this Letter, your rights under your 401K and pension
plans, payments due you for any unreimbursed business expense or medical expense
incurred prior to your resignation, unless such medical expense is covered by
COBRA, or any of the obligations under any other agreements, including, without
limitation, provisions of the Employment Agreement, which survive the
termination of such Employment Agreement.
Further, you hereby agree not to disparage, publicly or
privately, any of the Company Parties, and agree that you will allow Castle
reasonable opportunity to review any press releases, announcements, governmental
filings and the like being issued or filed by you and involving any of the
Company Parties, prior to such issuance or filing.
Finally, you agree to make yourself available at times and
places reasonably convenient to you, for a period of one year, to consult with
respect to litigation and related matters involving the Castle Group, that
occurred when you were an employee of the Castle Group. Castle agrees to pay you
the lesser of $1,500 per day or $200 per hour, or part thereof, if less than a
whole day is served plus your out-of-pocket expenses for such services within
five days of receiving an invoice from you.
The Castle Group hereby acknowledges that, except as otherwise
contemplated herein, the execution of this Letter is full and complete
satisfaction of any and all liabilities or obligations you and/or your spouse
have or may have to the Company Parties or any member of the Company Parties,
including without limitation any liabilities or obligations contained in the
Employment Agreement or under any other agreement.
Castle, hereby represents and warrants that it is authorized
and empowered to, and does hereby on behalf of the Company Parties, jointly and
severally, release and discharge you and all of your affiliates from any and all
claims, liabilities, demands, actions, and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit known or
unknown, fixed or contingent that any of them may have or claim to have
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 3
against you and the Company Parties do hereby covenant not to file a lawsuit or
participate in any class action lawsuit to assert such claims. This release and
waiver, includes, but is not limited to, claims arising out of or in connection
with (i) the Company Parties (or any member thereof) business relationships with
you; (ii) any allegation that you breached the Employment Agreement or any other
agreements, written or otherwise, by your resignation from Castle; or (iii) any
other statutory and common law cause of action; provided that this release is
limited to the extent of any applicable law limiting the scope of a release of
this type.
Further, the Company Parties, jointly and severally, hereby
agree not to disparage you, publicly or privately, and agree to allow you
reasonable opportunity to review any press releases, announcements, governmental
filings and the like issued or filed by any of the Company Parties and involving
you or any of your affiliates, prior to such issuance or filing.
The Castle Group further covenants that it will not, or will
not attempt to (i) defer, suspend, or postpone any payment due under this
Letter, or; (ii) offset, set-off, or recoup therefrom any claim against any of
its outstanding obligation to make payments under this Letter. The occurrence of
such an event as described in items (i) and (ii) of this paragraph, or failure
by the Castle Group to pay any amount when due (and such failure continues for a
period not to exceed five days after your giving of notice to the Castle Group)
shall constitute a breach of this Letter. Upon the occurrence of a breach of
this Letter the entire amount of outstanding payment obligations shall
immediately become due and payable, and, all of your obligations pursuant to any
provision contained in this Letter shall cease immediately and be deemed
unenforceable by the Company Parties or any member thereof.
Castle hereby guarantees the performance of the Company
Parties hereunder and agrees to indemnify you for any damages, cost, or expense,
including reasonable attorneys fees, you incur from any failure by any member of
the Company Parties to perform its obligations under this Agreement.
The members of the Castle Group, jointly and severally, agree
(a) to continue indefinitely hereafter to indemnify, defend, reimburse and hold
you harmless, to the same extent, and under the same terms, as you are currently
indemnified under any contractual arrangement (including, without limitation,
this Letter, the Employment Agreement and the Purchase Agreement) or under any
charter, articles or certificate of incorporation, by-laws or partnership
agreement of any Castle Group member, and (b) except as specifically
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 4
precluded by applicable Delaware law, to pay promptly on your behalf and on an
ongoing basis, for any out-of-pocket costs and expenses incurred by you at any
time hereafter (including reasonable attorneys fees and expenses) in connection
with any litigation, regulatory proceeding, investigation or other action
currently or at any time hereafter maintained, pursued or initiated and in which
any Castle Group member is or becomes involved.
The Company Parties acknowledge and agree that, from and after
the date hereof, (a) you are not restricted by your prior or current
relationships with any of the Company Parties from pursuing and entering into
any employment, business ventures or opportunities whatsoever, in your sole and
absolute discretion.
Without the express consent of Castle, you will not disclose
or make available to anyone outside the members of the Company Parties any
confidential or proprietary information of, or concerning the prior members of
the Castle Group that you were aware of as of the date of your resignation
including without limitation trade secrets, customer lists, data, reports,
studies, test results, pricing, hedging and other strategies, inventories, or
other information not generally known to third parties; provided, however, that
this paragraph shall not obligate you to keep confidential any of the items or
information listed in this paragraph that are publicly available, or, are
general trade knowledge or other information and trade practices that are not
unique to the Castle Group. Your obligations under this paragraph shall
indefinitely survive any termination of the Employment Agreement and you agree
that Castle shall have the right to obtain injunctive and other equitable relief
to enforce your obligations hereunder (in addition to other available remedies).
This Letter is confidential, except to the extent disclosure
is required by law. None of the Company Parties nor you shall discuss this
Letter, or its terms or the payments to be made hereunder, to any person except
(a) CORE or Castle Group employees who must have knowledge of it as part of
their duties, (b) attorneys of the parties hereto, (c) tax advisors of the
parties hereto (d) persons or entities with which you are doing or seek to do
business, who agree to keep this Letter confidential and (e) your spouse.
Nothing contained in this Letter may be construed as an
admission by he Company Parties or you of any liability, wrongdoing, or unlawful
conduct.
This Letter shall be binding upon the respective successors,
heirs, assigns, administrators, executors and legal representatives of the
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 5
parties. If any provision, section, subsection or other portion of this Letter
shall be determined by any court of competent jurisdiction to be invalid,
illegal or unenforceable, in whole or in part, and such determination shall
become final, such provision or portion shall be deemed to be severed or
limited, but only to the extent required to render the remaining provisions and
portion of this Letter enforceable. This Letter as thus amended shall be
enforced so as to give effect to the intention of the parties insofar as that is
possible. In addition, the parties hereby expressly empower a court of competent
jurisdiction to modify any term or provision of this Letter to the extent
necessary to comply with existing law and to enforce this Letter as modified.
This Letter shall be deemed to have been executed and
delivered within the Commonwealth of Pennsylvania, and the rights and
obligations of the parties shall be construed and enforced in accordance with,
and governed by, the laws of the State of Texas without regard to the principles
of conflict of laws. The parties agree that any dispute relating to this Letter
or your employment and other relationship with the Castle Group or the
termination thereof shall be submitted by the parties to, and decided by, the
state or federal courts in the State of Texas.
In the event of litigation in connection with or concerning
the subject matter of this Letter, the prevailing party shall be entitled to
recover all costs and expenses of litigation incurred by it, including such
party's reasonable attorneys' fees. The prevailing party shall also be entitled
to recover in addition to its damages an additional amount equal to 100% of its
damages for the failure of the other party to perform it obligations under this
Letter.
You acknowledge that Castle has advised you to consult with an
attorney prior to executing this Letter. The Company Parties acknowledge that
they have been advised by experienced counsel, have conducted whatever
investigation they and their counsel deem necessary to assure themselves that
they have no claims against you of which they are not aware, and have assured
themselves that it is prudent and desirable for them to enter into this Letter
with you.
The parties hereto acknowledge that, except as provided in
this Letter, no party (nor any officer, agent, employee, representative, or
attorney for any party) has made any statement or representation to any other
party regarding any fact relied upon in entering into this Letter, and each
party does not rely on any statement, representation or promise of any other
party (or any officer, agent, employee, representative, or attorney for any
party) in executing this Letter, or in making the settlement provided for
herein, except as expressly stated in this Letter.
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 6
Each party or responsible officer thereof has read this Letter
and understands the contents thereof. The officer executing this Letter on
behalf of any member of the Castle Group is empowered and duly authorized to do
so and hereby binds Castle and the Company Parties.
In entering into this Letter, each party assumes the risk of
any misrepresentation, concealment or mistake. If any party should subsequently
discover that any fact relied upon by him, her or it in entering into this
Letter was untrue or that any fact was concealed from him, her or it, or that
his, her or its understanding of the facts or the law was incorrect, such party
shall not be entitled to any relief in connection therewith including, without
limitation, any alleged right or claim to set aside or rescind this Letter. This
Letter is intended to be and is final and binding between the parties hereto,
regardless of any claims of misrepresentation, promises made without intention
to perform, concealment of fact, mistake of fact or law, or of any other
circumstance whatsoever.
The Company Parties covenant and agree that in the event it
breaches any provision of this Letter you shall have, in addition to all other
remedies available in the event of a breach of this Letter, the right to
injunctive relief, specific performance and other equitable remedies.
Each term of this Letter is contractual and not merely a
recital. The parties shall execute all such further and additional documents as
shall be necessary or desirable to carry out the provisions of this Letter.
If the above terms are acceptable to you, please sign and date
the duplicate of this Letter and return it to me. Moreover, by signing this
Letter you affirm as, we have done in signing this Letter, that you have
carefully read this Letter and that you fully understand the meaning and intent
of this Letter and that you have signed it voluntarily and knowingly.
Notices and payments required under this agreement should be
to the following:
Mr. David M. Hermes
4023 Colony Oaks Drive
Sugar Land, Texas 77479
<PAGE>
Mr. David M. Hermes
January 22, 1996
Page 7
Castle Energy Corporation
Mr. Richard E. Staedtler
One Radnor Corporate Center
Suite 250
100 Matsonford Road
Radnor, PA 19087
Very truly yours,
CASTLE ENERGY CORPORATION
IP OIL COMPANY for
itself and as sole general /s/ Joseph L. Castle II
partner of INDIAN POWERINE -----------------------------
LIMITED PARTNERSHIP Joseph L. Castle II
By: /s/ Joseph L. Castle II POWERINE OIL COMPANY
-----------------------------
Its: /s/ Joseph L. Castle II
-------------------- ------------------------------
Joseph L. Castle II
AGREED & ACCEPTED INDIAN REFINING &
MARKETING, INC.
/s/ David M. Hermes for itself and as sole general
- ---------------------------------- partner of INDIAN REFINING I
David M. Hermes LIMITED PARTNERSHIP
Dated: 1/25/96 By: /s/ Joseph L. Castle
---------------------------- --------------------------
Joseph L. Castle
<PAGE>
EXHIBIT A
SEVERANCE PACKAGE
The Castle Group and each member thereof, jointly and
severally, agrees to pay and provide the following Severance Package to David M.
Hermes ("Hermes"):
1. Castle shall pay Hermes cash payments totaling Three
Hundred and Four Thousand Dollars ($304,000), subject to applicable tax
withholding, in the following amounts:
(a) Payment of One-Hundred and One Thousand, Three
Hundred and Twenty-Eight Dollars ($101,328) payable on or
before January 31, 1996 (the "Initial Payment"). The Parties
acknowledge that $8,475 of this amount has already been paid.
(b) Payment of Twenty-Five Thousand Three Hundred
Thirty-Four Dollars ($25,334) commencing January 31, 1996 and
payable monthly thereafter on the last day of each month
through August 31, 1996 until payments under this paragraph 1
aggregating Three Hundred and Four Thousand Dollars
($304,000), including the Initial Payment, have been made to
Hermes (the "Deferred Amount").
2. Continued life, health and disability insurance until the
Deferred Amount has been paid (at which time Hermes will be eligible for
applicable COBRA benefits at Hermes' expense), or as in existence on September
30, 1995.
3. Computer equipment, fax machine, printer and software
attached to the same at Hermes' residence for no cost at $0.00 value.
4. Options to continue 90 days following your resignation
from Castle and its subsidiaries.
5. Continued unencumbered access to the Houston office,
parking and equipment at Hermes' discretion until the earlier of (a) sub-lease
or lease of space or (b) pay-off of the outstanding balance Deferred Amount.
<PAGE>
JOHN D.R. WRIGHT III
264 Fox Hollow Drive
Vincennes, Indiana 47591
January 29, 1996
Castle Energy Corporation Indian Refining & Marketing Company
One Radnor Corporate Center Indian Refining & Marketing, Inc.
Suite 250 Indian Refining Limited Partnership
Radnor, PA 19087 P.O. Box 519, South Seventh Street
Attention: Mr. J. L. Castle Lawrenceville, IL 62439-0519
Attention: Mr. William S. Sudhaus
RE: Termination of Employment
-------------------------
Dear Sirs:
This letter agreement sets forth the terms of termination of the
employment of the undersigned John D.R. Wright III ("Wright") by Indian Refining
& Marketing Company, Indian Refining & Marketing, Inc. and Indian Refining
Limited Partnership (collectively, "Indian Refining") and by the Castle Energy
Corporation ("Castle") group. The parties hereto agree as follows:
1. Wright's employment by Indian Refining and the Castle group
terminated effective as of the close of business on December 22, 1995 (the
"Effective Time").
2. The following constitute the financial terms of Wright's
termination:
(a) Simultaneous with the execution hereof, Castle will pay
$58,000 to Wright by check. In addition, Wright will have no obligation or
liability, for principal, interest or otherwise, under Wright's promissory note
in the principal amount of $250,000 dated February 26, 1993 (the "Note") or the
related side letter dated February 25, 1993 between Wright and Indian
Refinancing Marketing, Inc. (the "Side Letter"). The $58,000 payment and release
of the Note are being made in exchange for Wright's surrender of his Bonus
Payment Rights which were awarded to him under the Bonus Payment Rights
Agreement (as defined below), and the parties agree to treat such payment and
release of obligation, for all accounting, tax and other purposes accordingly.
In particular, Indian Refining and/or Castle will report the payment and release
on Form 1099B, reflecting the payment and release as proceeds of Wright's Bonus
Payment Rights.
<PAGE>
(b) The parties acknowledge and agree that Wright has elected
to receive benefits under the Consolidated Omnibus Reconciliation Act of 1985
from and after the Effective Time, and that Wright and his family members will
continue to be eligible for applicable COBRA benefits, at Wright's expense,
through May 31, 1997.
(c) Indian Refining and Castle shall fully cooperate, and not
interfere, with Wright in his efforts to obtain distributions from the Indian
Refining Limited Partnership 401(k) Plan ("401(k) Plan").
(d) Indian Refining and Castle shall not interfere with Wright
in his efforts to obtain distributions from the Indian Refining Limited
Partnership Defined Benefit Plan ("Benefit Plan"). Neither Indian Refining nor
Castle shall be responsible for any interest Wright may claim in the Benefit
Plan.
(e) Nothing herein shall affect or be construed to affect
Wright's entitlement to benefits or any other of his rights under the 401(k)
Plan and/or the Benefit Plan.
3. Indian Refining and Castle shall be obligated to indemnify Wright
pursuant to, and shall in all respects comply with, the terms of Section 6 of
the Employment Agreement, dated as of October 1, 1991, as amended by Amendment
to Agreement dated as of February 25, 1993 (the "Employment Agreement"), which
terms shall survive the Effective Time and shall continue in full force and
effect.
4. Except as otherwise provided herein, the Employment Agreement, the
Bonus Payment Rights Agreement dated as of October 1, 1991, as amended by
Amendment to Agreement dated as of February 25, 1993 (the "Bonus Payment Rights
Agreement"), the Salary Reduction Agreement between Wright and Castle dated May
10, 1995 (the "Salary Reduction Agreement"), the Note, the Side Letter and all
agreements and instruments related to any of the foregoing are hereby terminated
and of no further force and effect.
5. Wright, on the one hand, and Indian Refining and Castle, on the
other, shall and hereby do release and discharge one another of and from all
claims, demands, debts, damages, liabilities, causes of action, actions and
suits whatsoever, in law or equity, which they had or now have or to which they
may hereafter become entitled, on account of any act, failure to act, or event
occurring prior to the date hereof, related in any manner to Indian Refining or
Castle or their respective businesses; provided, however, that the provisions of
this paragraph shall not affect (i) any obligation or liability under the terms
of this letter agreement or the matters incorporated herein, or (ii) the medical
and health plan benefits guaranteed to Wright under the Employment Agreement
through January 31, 1996.
<PAGE>
If you are in agreement with the foregoing, please sign and return this
enclosed copy of this letter.
Very truly yours,
/s/ John D.R. Wright III
-----------------------------
John D.R. Wright III
AGREED AS
OF January . . . . , 1996
Castle Energy Corporation
BY: /s/ Joseph L. Castle II
----------------------------
Indian Refining & Marketing, Inc.
BY: /s/ Joseph L. Castle II
----------------------------
Indian Refining Limited Partnership
BY: /s/ Joseph L. Castle II
----------------------------
<PAGE>
AMENDMENT NO. 1 TO STOCK AND ASSET PURCHASE AGREEMENT,
DATED AS OF NOVEMBER 21, 1995
This Amendment No. 1 to Stock and Asset Purchase Agreement
dated as of November 21, 1995 (this "Amendment No. 1") is made and entered into
as of the 11th day of December 1995, by and among Castle Energy Corporation, a
Delaware corporation ("Castle"), Indian Refining I Limited Partnership, an
Illinois limited partnership ("IRLP"), Indian Refining & Marketing I, Inc., an
Illinois corporation and the sole general partner of IRLP ("IRMI") (IRMI and
IRLP are collectively referred to as the "Asset Sellers"), and American Western
Refining, Inc., a Delaware limited partnership ("Buyer").
WHEREAS, Castle, the Asset Sellers and Am West GP, Inc. the
general partner of the Buyer, are parties to that certain Stock and Asset
Purchase Agreement dated as of November 21, 1995 (the "Purchase Agreement").
WHEREAS, Am West GP, Inc., has assigned all of its rights and
obligations under the Purchase Agreement to Buyer.
WHEREAS, the parties desire to amend the Purchase Agreement as
set forth in this Amendment No. 1.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants and agreements set forth herein, and intending to be
legally bound, Castle, the Asset Sellers and Buyer hereby agree as follows:
1. The following definition is hereby added in Section 1.1 of
the Purchase Agreement, immediately preceding the definition of "Asset Purchase
Price":
"Amendment No. 1" shall mean Amendment No. 1 to the
Stock and Asset Purchase Agreement dated as of November 21,
1995 among Castle, the Asset Sellers and Am West GP, Inc.
2. The definition of "Outstanding Liens" in Section 1.1 of the
Purchase Agreement is hereby amended to read in its entirety as follows:
"Outstanding Liens" shall mean the Liens identified
on Schedule 1.1B attached to the Purchase Agreement, as
amended by Amendment No. 1."
3. The definition of "Schedule 1.1B" in Section 1.1 of the
Purchase Agreement is hereby amended to read in its entirety as follows:
"Schedule 1.1B" shall mean the schedule dated
November 21, 1995 and attached to the Purchase Agreement
(before giving effect to Amendment No. 1), as supplemented by
the schedule dated December 8, 1995 and attached to Amendment
No. 1 as Exhibit A to Amendment No. 1, which schedules
collectively identify all Persons known to have a Lien on any
of the Purchased Assets at December 8, 1995, and in each case,
the amount of such Liability.
4. The parties hereto hereby agree that the Seller Note is
hereby amended to read in its entirety as set forth on Exhibit B to Amendment
No. 1.
1
<PAGE>
5. The list of Excluded Contracts set forth on Schedule 2.2D
to the Purchase Agreement is hereby amended by adding the following as an
"Excluded Contract": that certain Agreement made March 23, 1994 between IRLP and
ABB Lummus Crest Inc. for License and Basic Engineering Relating to a Delayed
Coker Plant, Lawrenceville Refinery, Illinois. Schedule 4.4 is amended by
deleting the reference to such Contract.
6. Section 7.11(b) of the Purchase Agreement is hereby deleted
in its entirety and replaced by the following Section 7.11(b), reading in its
entirety as follows:
"(b) If, at any time, Buyer shall elect to pay any amount
secured by any one of the Outstanding Liens, the amount so paid shall reduce the
obligations of the Buyer under the Seller Note dollar for dollar. The foregoing
is also permitted by the second sentence of Section 2(c) of the Seller Note."
7. The Purchase Agreement, as amended by this Amendment No. 1,
remains in full force and effect.
8. This Amendment No. 1 shall be governed by and construed in
accordance with the laws of the State of New York, without regard to its rules
on conflicts of law.
9. This Amendment No. 1 may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, and
shall become a binding agreement when one or more counterparts have been signed
by each of the parties and delivered to each of the other parties.
[balance of this page intentionally left blank]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be duly executed as of the date and year first above written.
CASTLE ENERGY CORPORATION
By: /s/ RICHARD E. STAEDTLER
-------------------------------
Title: Chief Financial Officer
INDIAN REFINING I LIMITED PARTNERSHIP
By: Indian Refining & Marketing I
Inc., General Partner
By: /s/ CHRIS A. WOODS
--------------------------
Title: Vice President
INDIAN REFINING & MARKETING I INC.
By: /s/ CHRIS A. WOODS
-------------------------------
Title: Vice President
AMERICAN WESTERN REFINING, L.P.
By: Am West GP, Inc., its general partner
By: /s/ B.N. BANERJEE
--------------------------
Title: President
3
<PAGE>
Exhibit 11.1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
--------------------------------------------------------------
1995 1994
----------------------------- --------------------------
Fully Fully
Primary Diluted Primary Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. Weighted Shares Outstanding, Net of Treasury 7,627,646 7,627,646 7,722,646 7,722,646
Stock Issued During the Period:
Stock, net (929,174) (929,174) 2,698,350 2,698,350
Options and warrants exercised 11,986 11,986 2,548 2,548
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 47,890 37,988 285,103 473,187
Assumed debenture conversion 19,200 19,200 500,000 500,000
----------- ----------- ----------- -----------
III. Weighted Average Shares and Equivalent Shares 6,777, 548 6,767,646 11,208,647 11,396,731
=========== =========== =========== ===========
IV. Net Income (Loss):
Continuing operations ($ 26,040) ($ 26,040) $ 16,340 $ 16,340
Discontinued operations:
Before adjustment 40,937 40,937 22,577 22,577
Assumed interest savings as if convertible
debentures exercised and retired 12 12 126 126
----------- ----------- ----------- -----------
$ 14,909 $ 14,909 $ 39,043 $ 39,043
=========== =========== =========== ===========
V. Net Income (Loss) Per Share:
Continuing operations ($ 3.84) ($ 3.84) $ 1.46 $ 1.44
Discontinued operations, as adjusted 6.04 6.04 2.02 1.99
----------- ----------- ----------- -----------
$ 2.20 $ 2.20 $ 3.48 $ 3.43
=========== =========== =========== ===========
</TABLE>
(1)
<PAGE>
Exhibit 11.1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------
1995 1994
------------------------ --------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
I. Weighted Shares Outstanding, Net of Treasury
Stock Issued During the Period:
Stock, net 6,683,646 6,683,646 11,227,646 11,227,646
Options and warrants exercised 9,451 9,451 (821,880) (821,880)
II. Weighted Equivalent Shares:
Assumed options and warrants exercised 28,646 30,883 403,616 525,160
Assumed debenture conversion 500,000 500,000
--------- --------- ---------- ----------
III. Weighted Average Shares and Equivalent Shares 6,721,743 6,723,980 11,309,382 11,430,926
========= ========= ========== ==========
IV. Net Income (Loss):
Continuing operations ($ 2,464) ($ 2,464) ($ 5,834) ($ 5,834)
Discontinued operations:
Before adjustment 5,114 5,114 25,324 25,324
Assumed interest savings as if convertible
debentures exercised and retired -- -- 66 66
--------- --------- ---------- ----------
$ 2,650 $ 2,650 $19,556 $ 19,556
========= ========= ========== ==========
V. Net Income (Loss) Per Share:
Continuing operations ($ .37) ($ .37) ($ .52) ($ .51)
Discontinued operations, as adjusted 0.76 0.76 2.25 2.22
--------- --------- ---------- ----------
$ .39 $ .39 $ 1.73 $ 1.71
========= ========= =========== =========
</TABLE>
(2)
<PAGE>
Exhibit 21
CASTLE ENERGY CORPORATION
Listing of Parent and Subsidiaries
As of February 29, 1996
<TABLE>
<CAPTION>
Relationship Company's
to Ownership
Entity Company Business Percentage
------ ------------ -------- ----------
<S> <C> <C> <C>
Parent
Castle Energy Corporation Parent Holding Company N/A
Refining
Indian Refining I. L.P. Subsidiary- Refining - Inactive 100%
Limited
Partnership
Indian Refining & Marketing I. Inc. Subsidiary General Partner of IRLP - Inactive 100%
Powerine Holding Corp. Subsidiary Holding Company - Inactive 100%
Indian Oil Company Subsidiary Refiner - Inactive 100%
Natural Gas Marketing
Castle Pipeline Company Subsidiary General Partner - Pipeline 100%
Partnership
Castle Pipeline Resources Company Subsidiary Limited Partner - Pipeline 100%
Partnership
Castle Texas Pipeline L.P. Subsidiary Natural Gas Transmission 100%
Limited
Partnership
CEC Marketing Company Subsidiary General Partner - Gas Marketing 100%
Partnership
CEC Marketing Resources Company Subsidiary Limited Partner - Gas Marketing 100%
Partnership
CEC Gas Marketing L.P. Subsidiary- Gas Marketing 100%
Limited
Partnership
Exploration and Production
Castle Exploration Company, Inc. Subsidiary Oil and gas development, drilling 100%
and well operations
Castle Production Company Subsidiary General Partner - Production 100%
Partnership
Castle Production Resources Subsidiary Limited Partner - Production 100%
Company Partnership
Castle Texas Production L.P. Subsidiary- Oil and gas production 100%
Limited
Partnership
Supply
Castle Energy Canada Ltd. Subsidiary Supply, Operations and Marketing 100%
IP Oil Co., Inc. Subsidiary General Partner 100%
Hedging/Future - Inactive
Indian Powerine L.P. Subsidiary- Supply/Hedging/Futures - Inactive 100%
Limited
Partnership
Other
CEC, Inc. Subsidiary Passive Activities 100%
Longview Acquisition Corp. Subsidiary Acquisitions 100%
</TABLE>
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-88760) of Castle Energy Corporation of our report
dated March 14, 1996 appearing on page 66 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 14, 1996
<PAGE>
CONSENT
February 26, 1996
Mr. Richard E. Staedtler
Chief Financial Officer
Castle Energy Corporation
One Radnor Corporate Center
100 Matsonford Road
Suite 250
Radnor, PA 19087
Dear Rick:
We hereby consent to the use of our name and reference to our report in
the Form 10-K of Castle Energy Corporation for the year ended September 30,
1995.
Sincerely,
/s/ Richard J. Marshall
------------------------------
Authorized Signature
March 5, 1996
------------------------------
Date
<PAGE>
CONSENT
February 26, 1996
Mr. Richard E. Staedtler
Chief Financial Officer
Castle Energy Corporation
One Radnor Corporate Center
100 Matsonford Road
Suite 250
Radnor, PA 19087
Dear Rick:
We hereby consent to the use of our name and reference to our report in
the Form 10-K of Castle Energy Corporation for the year ended September 30,
1995.
Sincerely,
/s/Keith N. Mangini
------------------------------
Authorized Signature
January 29, 1995
------------------------------
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Company's
Consolidated Financial Statements for the fiscal year ended September 30, 1995
included in Item 8. Financial Statements and Financial Statement Schedules and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 10,300
<SECURITIES> 0
<RECEIVABLES> 5,641
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,520
<PP&E> 28,444
<DEPRECIATION> 5,448
<TOTAL-ASSETS> 116,904
<CURRENT-LIABILITIES> 43,994
<BONDS> 23,616
0
0
<COMMON> 3,347
<OTHER-SE> 38,290
<TOTAL-LIABILITY-AND-EQUITY> 116,904
<SALES> 79,599
<TOTAL-REVENUES> 79,599
<CGS> 40,160
<TOTAL-COSTS> 64,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,046
<INCOME-PRETAX> 11,783
<INCOME-TAX> 37,823
<INCOME-CONTINUING> (26,040)
<DISCONTINUED> 40,937
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,897
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.20
</TABLE>
