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