<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 June 30, 1996
--------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended ____________________________________________
Commission file number: 0-10990
--------
CASTLE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Radnor Corporate Center, Suite 250,
100 Matsonford Road, Radnor, Pennsylvania 19087
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (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: 6,693,646 shares of
Common Stock, $.50 par value, as of August 1, 1996.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1996 (Unaudited)
and September 30, 1995................................................................... 1
Consolidated Statements of Operations - Three Months
Ended June 30, 1996 and 1995 (Unaudited)................................................. 2
Consolidated Statements of Operations - Nine Months
Ended June 30, 1996 and 1995 (Unaudited)................................................. 3
Consolidated Statements of Cash Flows - Nine Months
Ended June 30, 1996 and 1995 (Unaudited)................................................. 4
Consolidated Statements of Stockholders' Equity - Nine
Months Ended June 30, 1996 (Unaudited) and Year Ended
September 30, 1995....................................................................... 5
Notes to the Consolidated Financial Statements (Unaudited)............................... 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 11-14
Part II. Other Information
Item 1. Legal Proceedings........................................................................ 15
Item 6. Exhibits and Reports on Form 8-K......................................................... 15
Signatures .................................................................................................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 2,245 $ 5,341
Restricted cash........................................................... 5,075 4,959
Accounts receivable....................................................... 5,412 5,641
Prepaid expenses and other current assets................................. 241 153
Deferred income taxes..................................................... 4,623 4,623
Estimated realizable value of discontinued net refining assets............ 6,803 10,803
--------- ---------
Total current assets.................................................... 24,399 31,520
Property, plant and equipment, net:
Natural gas transmission.................................................. 21,594 22,720
Furniture, fixtures and equipment......................................... 235 276
Oil and gas properties, net................................................... 15,666 17,410
Gas contracts, net............................................................ 27,485 34,515
Other assets, net............................................................. 666 463
Note receivable............................................................... 10,000 10,000
--------- ----------
Total assets............................................................ $100,045 $116,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 10,975 $ 12,080
Current portion of long-term debt - related party......................... 250
Accounts payable.......................................................... 3,662 4,715
Accrued expenses.......................................................... 2,051 3,284
Other liabilities......................................................... 3,315 3,323
Net refining liabilities retained......................................... 11,043 20,342
--------- ----------
Total current liabilities............................................... 31,046 43,994
Long-term debt................................................................ 7,278 23,616
Other long-term liabilities................................................... 66 83
Deferred income taxes......................................................... 7,574 7,574
--------- -----------
Total liabilities....................................................... 45,964 75,267
--------- ----------
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 shares issued and outstanding................................. 3,347 3,347
Additional paid-in capital.................................................... 66,316 66,316
Accumulated deficit........................................................... (15,582) (28,026)
--------- ----------
Total stockholders' equity.............................................. 54,081 41,637
--------- ----------
Total liabilities and stockholders' equity.............................. $100,045 $116,904
========= ==========
</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 June 30,
------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales .......................................................... $ 14,474 $ 17,800
----------- -----------
Exploration and production:
Oil and gas sales .................................................. 2,065 2,854
Well operations .................................................... 77 112
----------- -----------
2,142 2,966
----------- -----------
16,616 20,766
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ...................................................... 9,748 10,041
Operating costs .................................................... 360 192
General and administrative ......................................... 218 371
Depreciation and amortization ...................................... 2,851 2,846
----------- -----------
13,177 13,450
----------- -----------
Exploration and production:
Oil and gas production ............................................. 565 642
General and administrative ......................................... 156 282
Depreciation, depletion and amortization ........................... 623 805
----------- -----------
1,344 1,729
----------- -----------
Corporate general and administrative expenses ........................ 680 1,204
----------- -----------
15,201 16,383
----------- -----------
Operating income ......................................................... 1,415 4,383
----------- -----------
Other income (expense):
Interest income ...................................................... 226 263
Other income ......................................................... 478 65
Interest expense ..................................................... (303) (730)
----------- -----------
401 (402)
----------- -----------
Income from continuing operations before income taxes .................... 1,816 3,981
----------- -----------
Provision for (benefit of) income taxes related to continuing operations:
State ............................................................ (145)
Federal .......................................................... (1,013)
----------- -----------
(1,158)
----------- -----------
Income from continuing operations ........................................ 1,816 5,139
Income (loss) from discontinued refining operations less applicable income
taxes of $0 in 1996 and a tax benefit of $4,675 in 1995, respectively (7,012)
----------- -----------
Net income (loss) ........................................................ $ 1,816 ($ 1,873)
=========== ===========
Net income (loss) per share:
Income per share from continuing operations - primary ................ $ .27 $ .77
=========== ===========
- fully diluted ................................................ $ .27 $ .77
=========== ===========
Loss per share from discontinued refining operations
- primary ...................................................... ($ 1.05)
=========== ===========
- fully diluted ................................................ ($ 1.05)
=========== ===========
Net income (loss) per share - primary ................................ $ .27 ($ .28)
=========== ===========
- fully diluted ................................................ $ .27 ($ .28)
=========== ===========
Weighted average number of common and common equivalent shares
outstanding - primary ............................................ 6,729,769 6,668,976
=========== ===========
- fully diluted ................................................ 6,729,827 6,712,505
=========== ===========
</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>
Nine Months Ended June 30,
-----------------------------
1996 1995
----------- ------------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ............................................................ $ 50,271 $ 58,989
----------- -----------
Exploration and production:
Oil and gas sales .................................................. 6,466 6,741
Well operations .................................................... 345 365
----------- -----------
6,811 7,106
----------- -----------
57,082 66,095
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ...................................................... 29,814 33,621
Operating costs .................................................... 792 675
General and administrative ......................................... 746 847
Depreciation and amortization ...................................... 8,545 8,538
----------- -----------
39,897 43,681
----------- -----------
Exploration and production:
Oil and gas production ............................................. 1,861 1,675
General and administrative ......................................... 575 640
Depreciation, depletion and amortization ........................... 1,813 2,253
----------- -----------
4,249 4,568
----------- -----------
Corporate general and administrative expenses ........................ 2,930 3,426
----------- -----------
47,076 51,675
----------- -----------
Operating income ......................................................... 10,006 14,420
----------- -----------
Other income (expense):
Interest income ...................................................... 697 770
Other income ......................................................... 3,261 17
Interest expense ..................................................... (1,520) (3,061)
----------- -----------
2,438 (2,274)
----------- -----------
Income from continuing operations before income tax ...................... 12,444 12,146
----------- -----------
Provision for income taxes related to continuing operations:
State ............................................................ 4,030
Federal .......................................................... 28,216
----------- -----------
32,246
----------- -----------
Income (loss) from continuing operations ................................. 12,444 (20,100)
Income from discontinued refining operations less applicable income taxes
of $0 and $21,565, in 1996 and 1995, respectively .................... 32,347
----------- -----------
Net income ............................................................... $ 12,444 $ 12,247
=========== ===========
Net income (loss) per share:
Income (loss) per share from continuing operations - primary ......... $ 1.85 ($ 2.95)
=========== ===========
- fully diluted ................................................ $ 1.85 ($ 2.95)
=========== ===========
Income per share from discontinued refining operations
- primary ...................................................... $ 4.75
===========
- fully diluted ................................................ $ $ 4.75
=========== ===========
Net income per share - primary ....................................... $ 1.85 $ 1.80
=========== ===========
- fully diluted ................................................ $ 1.85 $ 1.80
=========== ===========
Weighted average number of common and common equivalent shares
outstanding - primary ............................................ 6,717,879 6,797,492
=========== ===========
- fully diluted ................................................ 6,729,172 6,785,861
=========== ===========
</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>
Nine Months Ended June 30,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash flow provided by operating activities ....................................... $ 26,477 $ 29,083
--------- ---------
Cash flows from investing activities:
Investment in refining plant ..................................................... (32,471)
Investment in oil and gas properties ............................................. (50) (4,066)
Investment in pipelines .......................................................... (276) (8)
Purchase of furniture, fixtures and equipment .................................... (283)
--------- ---------
Net cash used in investing activities ....................................... (326) (36,828)
--------- ---------
Cash flows from financing activities:
Proceeds of long-term debt ........................................................ 3,800 28,253
Payment of debt issuance costs .................................................... (388)
Repayment of long-term debt ....................................................... (32,644) (28,781)
Proceeds from exercise of stock options ........................................... 144
--------- ---------
Net cash provided by (used in) financing activities ......................... (29,232) (384)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................. (3,081) (8,129)
Cash and cash equivalents - beginning of period ...................................... 5,341 18,118
--------- ---------
Cash and cash equivalents - end of period ............................................ $ 2,260 $ 9,989
========= =========
Supplemental disclosures of cash flow information are as follows:
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
=========
</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)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance - October 1, 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
Net income............................ 12,444 12,444
---------- ------ ------- -------- --------
Balance - June 30, 1996............... 6,693,646 $3,347 $66,316 ($15,582) $54,081
========= ====== ======= ======== =======
</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 per 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 and nine month periods ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1996 or thereafter. 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, 1995. Reference should be made to such Form 10-K
for capitalized (defined) terms used herein.
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 nine month periods ended June 30, 1996 and 1995
and for a fair statement of financial position at June 30, 1996.
Note 2 - September 30, 1995 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1995
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, 1995.
Note 3 - Discontinued Operations
In 1994, the Company decided to discontinue the operations of its
refining business and to sell or retire its two refineries.
In July 1995, operations ceased at the Powerine Refinery and the assets
of the Powerine Refinery were retired. On September 29, 1995, Powerine Oil
Company ("Powerine"), the refining subsidiary owning the Powerine Refinery, sold
(for legal purposes) substantially all of its refining plant assets to Kenyen
Projects Limited ("Kenyen"), retaining certain rack facilities and the land on
which the Powerine Refinery is situated and certain other assets. The purchase
price was $22,763 consisting of $3,000 cash and a note for $19,763. The note was
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 Energy Merchant Corp. ("EMC"). As
part of the sale, EMC paid the Company $1,000 and indemnified Powerine and the
Company for any and all environmental liabilities of Powerine. Subsequent to
January 16, 1996, the financial press reported that EMC had acquired the
Powerine Refinery from Kenyen.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
On September 30, 1995, operations ceased at the Company's second
refinery, the Indian Refinery, and Indian Refining I Limited Partnership
("IRLP"), the subsidiary owning the Indian Refinery, retired the plant assets of
the Indian Refinery. On December 12, 1995, IRLP sold the plant assets of the
Indian Refinery to American Western Refining L.P., a subsidiary of Gadgil
Western Corporation ("American Western"). 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 liabilities and all environmental
liabilities, in conjunction with the sale. IRLP also sold certain precious metal
catalysts to American Western for a note for $1,803.
As a result of the discontinuance of refining operations, assets and
liabilities related to the refining segment have been netted. The estimated
realizable value of refining assets is shown under the caption "Estimated
realizable value of discontinued net refining assets" on the accompanying
Consolidated Balance Sheet. The estimated value of all other refining assets and
liabilities retained is shown under the caption "Net refining liabilities
retained."
An analysis of the assets and liabilities related to the refining
segment for the period October 1, 1995 to June 30, 1996 is as follows:
Estimated
Realizable
Value of Net
Discontinued Refining
Net Liabilities
Refining Assets Retained
--------------- --------
Balance - October 1, 1995.................... $10,803 $20,342
Cash transactions............................ (4,000) (9,299)
-------- -------
Balance - June 30, 1996...................... $ 6,803 $11,043
======== =======
Note 4 - Contingencies
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. MG Refining
& Marketing, Inc. ("MGRM"), a subsidiary of Metallgesellschaft Corporation
("MG"), 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
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Commercial Code. The complaint further alleged that the LTSA should be
terminated because its purpose has been frustrated and the performance had
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 added 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. As part of the sale, American Western assumed all liabilities and
expenses associated with the LTSA litigation. On July 29, 1996, the Shell
litigation was settled. MGRM, MG, IRLP and American Western released Shell from
all liabilities and Shell released MGRM, MG, IRLP and American Western from all
liabilities. No payments were made or obligations assumed by any of the parties
in conjunction with the settlement. In addition, IRLP and American Western, on
the one hand, and MG and MGRM, on the other hand, provided mutual releases. Such
releases did not, however, affect on-going business transactions between MG and
its affiliates and the Company and its affiliates.
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it
to MG Trade Finance Corp. ("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.
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
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Company's note from MG will be discharged and neither the Company nor MG will
owe the other. In such case the Company's future earnings will also be adversely
impacted since the Company has not recorded any reserve against the note
believing that it will prevail in the arbitration.
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 was due to be paid to the escrow
account for the Powerine Arbitration. The Company has filed suit to compel
payment of the note.
Swap Agreement
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MG Natural Gas Corp. ("MGNG"), a
subsidiary of MG, 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 and expects to prevail.
Note 5 - Stockholder Litigation Recovery
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. The recovery is shown as "Other Income"
in the Consolidated Statement of Operations.
Note 6 - Credit Facility
In May 1996, the Company obtained a credit facility from a bank for
$3,800. The credit facility is collateralized by the Company's exploration and
production assets and a second lien on the Company's natural gas marketing and
transmission assets and is payable as a term loan over sixteen months. The
amount outstanding under the credit facility bears interest at the prime rate
plus 1%. At June 30, 1996 the amount outstanding under the credit facility was
$3,715.
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 7 - Engagement of Financial Advisor
On March 5, 1996, the Company engaged Lazard Freres & Co., LLC 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, continuing to operate under the current structure or other
restructuring measures. If any of the alternatives are undertaken, future
operations of the Company may be different from current operations.
Note 8 - Subsequent Events
In connection with the sale of the Indian Refinery to American Western
in December 1995, one of the Company's subsidiaries sold platinum to American
Western for cash and a promissory note in the principal amount of $1,803. The
note was originally due on February 11, 1996, but the Company extended the note
to March 22, 1996 and thereafter refrained from seeking to collect on the note
to allow American Western time to obtain financing. In April 1996, American
Western informed the Company that American Western had obtained a commitment
from a financial institution to provide such financing; however, American
Western later informed the Company that it was unable to conclude such
financing. As a result, the Company's subsidiary, which has a first security
interest in the platinum, seized its platinum collateral and is in the process
of liquidating it. To date, the Company's subsidiary has received $957 from the
liquidation of the collateral.
As part of the purchase price for the Indian Refinery, IRLP received
from American Western a promissory note in the principal amount of $5,000, due
the earlier of October 31, 1996 or the date American Western obtains financing
to restart the Indian Refinery. Under the terms of the note and a related escrow
agreement, American Western was obligated to make quarterly interest payments on
the note into an escrow fund held for the benefit of the creditors of IRLP. To
date, no interest payments have been made. Accordingly, IRLP gave American
Western notice that the note was in default and that the note plus accrued
interest were due immediately. During the first half of August 1996, American
Western made arrangements to pay the note. Nevertheless, although payment is
expected, it had not been received as of August 14, 1996. If American Western
does not pay the note, IRLP will not have funds to pay its trade creditors. (The
note plus accrued interest aggregates $5,308 whereas IRLP's creditor liabilities
approximate $7,000.) Under such circumstances, IRLP may have to foreclose on and
sell the Indian Refinery assets to obtain payment on the note or, failing same,
consider filing a voluntary petition for bankruptcy.
In July 1996, a non-operating interest owner in wells operated by one
of the Company's subsidiaries filed a lawsuit against the Company and three of
its subsidiaries (see "Legal Proceedings" in Part II).
In July 1996, a suit was filed against Powerine and the Company was
named as a co-defendant. The Company has still not been served with the suit
(see "Legal Proceedings" in Part II).
In July 1996, the Shell Litigation was settled (see Note 4).
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. As a result, management's discussion and
analysis focuses on the Company's continuing operations -- natural gas marketing
and transmission and exploration and production. All references herein to
dollars are in thousands.
The discussion and analysis below includes forward-looking data that
are based upon management's estimates, assumptions and projections. Important
factors such as litigation, oil and gas price fluctuations and other factors
could cause results to differ materially from those expected by management.
Revenues
Natural Gas Marketing and Transmission
Gas sales from natural gas marketing decreased $8,718 or 14.8% from the
first nine months of fiscal 1995 to the first nine months of fiscal 1996. The
decrease was attributable to two factors: a decrease in the annual volumes Lone
Star Gas Company, the sole natural gas customer ("Lone Star"), is required to
take and the fact that deliveries under the related Lone Star Contract are not
proportional throughout the Company's fiscal year.
Commencing February 1, 1996, the annual volumes Lone Star is required
to take under the Lone Star Contract decreased 8.6%. A further and final 1.4%
decrease in required volume is scheduled for February 1, 1997. The Lone Star
Contract terminates May 31, 1999.
Although the volumes sold to Lone Star annually are essentially fixed
(the Lone Star Contract has a take-or-pay provision) and the price received for
the gas delivered to Lone Star is also essentially fixed, 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 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 during the Company's fiscal periods. For the first nine months of
fiscal 1996, deliveries to Lone Star approximated seventy-five percent (75%) of
annual deliveries required under the Lone Star Contract. The Company, however,
expects that deliveries to Lone Star during the last quarter of fiscal 1996 will
approximate only seventy percent (70%) of average quarterly deliveries because
a) deliveries during July approximated only seventy percent (70%) of average
monthly volumes and b) deliveries during the Company's last fiscal quarter have
generally been at such a level. Conversely, the Company expects that deliveries
during the period October 1, 1996 to December 31, 1996, the Company's first
quarter of fiscal 1997, will exceed average quarterly deliveries by fifteen to
twenty percent (15%-20%).
-11-
<PAGE>
Exploration and Production
Oil and gas sales decreased $275 or 4.1% from the nine months ended
June 30, 1995 to the nine months ended June 30, 1996. The decrease is comprised
of two offsetting factors. Production volumes and thus oil and gas sales
declined approximately 16% during the period consistent with the fact that the
Company has not replaced any of its reserves or conducted any new drilling. Gas
prices, however, increased an average of approximately 15% during the period due
to short gas supplies and cold weather - especially in January and February
1996.
Expenses
Natural Gas Marketing and Transmission
Gas purchases for natural gas marketing decreased $3,807 or 11.3% from
the first nine months of fiscal 1995 to the first nine months of fiscal 1996.
This decrease compares to a 14.8% decrease in natural gas marketing sales for
the same periods. For the nine months ended June 30, 1995, gas purchases
comprised 57.0% of gas sales versus 59.3% of gas sales for nine months ended
June 30, 1996. The increase in gas purchases as a percentage of gas sales is
attributable to a higher proportion of variable price gas (sold at spot market
prices) and a higher average spot price during the 1996 period.
Exploration and Production
Oil and gas production (lease operating) expenses increased $186 or
11.1% for the nine months ended June 30, 1996. For the nine months ended June
30, 1995 oil and gas production expenses comprised 24.8% of oil and gas sales
versus 28.8% of oil and gas sales for the nine months ended June 30, 1996. The
increase in the oil and gas production expense is anticipated since the
Company's oil and gas reserves are maturing and the costs to produce such mature
reserves generally exceeds that required to produce more recently developed
reserves. Nevertheless, oil and gas production expenses typically do not occur
evenly throughout the year and a comparison of expenses for annual fiscal
periods is more indicative of future results.
Depreciation, depletion and amortization decreased $440 or 19.5% from
the first nine months of fiscal 1995 to the first nine months of fiscal 1996.
Such decrease parallels the decrease in production.
Other Income (Expenses)
Other income increased $3,244 from 1995 to 1996. Of this amount, $2,725
represented recoveries 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. The remaining $519 represented retroactive insurance premium
reductions and the settlement of recorded liabilities at amounts less than
recorded book values. There were no counterparts to these items in fiscal 1995.
Interest expense decreased $1,541 or 50.3% from the first nine months
of fiscal 1995 to the first nine months of fiscal 1996. The decrease is
primarily attributable to the decrease in debt owed
-12-
<PAGE>
to General Electric Capital Corporation ("GECC"), the Company's natural gas
marketing and transmission lender. This debt constituted over 90% of the
Company's average debt applicable to continuing operations in both periods being
compared and has a fixed annual interest rate of 8.33%.
TAX PROVISIONS
The tax provision allocated to continuing operations for the nine
months ended June 30, 1995 has been determined pursuant to "Financial Accounting
Standards 109 -- Accounting for Income Taxes" ("FAS/109"). The $32,246 provision
against pretax income from continuing operations of $12,146 results primarily
because of the creation of a valuation reserve for deferred taxes at December
31, 1994. Previously, the Company had recorded deferred tax assets on all of its
tax carryforwards in anticipation of selling its refineries to CORE Refining
Corp. ("CORE") in a transaction that would have created taxable income.
Subsequently, the CORE transaction failed and the valuation reserve was created
because it then became probable that the Company would not be liable for taxes
in fiscal 1995 as originally estimated. 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 tax years.
No tax provision was required for the nine month period ended June 30,
1996 because, as a result of strategies being pursued that will more likely than
not generate taxable income, management believes the Company will utilize some
of its tax carryforwards during the current year resulting in a projected annual
tax rate of zero.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's unrestricted cash aggregated $2,245.
Although all of the cash flow from its natural gas marketing and transmission
business is essentially dedicated to repayment of GECC, its natural gas
marketing lender, the Company expects to have repaid the related loan by
December 1996 or January 1997. Once the GECC loan is repaid the Company's cash
flow from natural gas transmission and marketing activities, approximately
$22,500 per year, will be available for other purposes. Although the Company is
also indebted to a subordinated lender ($3,715 was owed at June 30, 1996), the
subordinated loan is a term loan payable over 18 months, and the first nine
monthly debt service payments are only $95 each. As a result of the foregoing,
the Company does not foresee any cash flow or liquidity problems once the GECC
loan is repaid.
Until the GECC loan is repaid, the Company anticipates that the $2,245
of unrestricted cash and the undedicated net cash flow from the Company's
exploration and production segment will cover the Company's corporate cash
requirements. In addition, the Company has also received a commitment from the
bank for a $25,000 facility. Under the terms of such facility the proceeds would
be used to refinance the natural gas marketing and transmission debt and the
$3,715 subordinated debt and for new drilling but such debt would be repaid over
a longer period and only 35%-40% of the cash flow would be dedicated to debt
service - instead of 100% of cash flow as is presently the case. If the Company
concludes such a facility and repays the natural gas marketing and transmission
debt, it would have significant cash flow available for drilling and other
reserve and pipeline acquisitions.
-13-
<PAGE>
Although the Company anticipates that it can close the $25,000
facility, there can be no assurance that such will be the case. Various consents
and collateral liens are required and there can be no assurance such liens and
consents will be forthcoming. In addition, the Company has projected its cash
requirements through January 1997 on the assumption that no environmental costs
related to its discontinued refining segment will be incurred and that other
legal costs will not be material. There can be no assurance, however, that such
will be the case. Finally, the Company has projected its cash requirements
through January 1997 assuming the same level of operations as is currently the
case. As noted in Note 7 to the June 30, 1996 financial statements, the Company
engaged Lazard Freres & Co. to explore strategic alternatives to enhance
stockholder value, including the sale of assets, the sale of the Company, merger
or joint venture. If the Company undertakes any of these alternatives, the
Company's cash requirements may be significantly different.
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Subsequent to June 30, 1996, the Company, IRLP and the other parties
settled the Shell Litigation. (See Note 4 to the interim financial statements.)
In July 1996 , an owner of non-operating oil and gas interests in wells
operated by Castle Texas Production Limited Partnership, one of the Company's
oil and gas subsidiaries ("CTPLP"), filed a suit against the Company, CTPLP,
Castle Texas Pipeline Limited Partnership (the Company's pipeline subsidiary),
CEC Gas Marketing L.P. (the Company's gas marketing subsidiary), Atlantic
Richfield Company, B&A Pipeline Company, and MGRM. The plaintiff claims, among
other things, that the parties being sued have underpaid non-operating working
interest owners, royalty interest owners, and overriding royalty interest owners
with respect to gas production from oil and gas properties operated by CTPLP and
attempts to bring a class action on behalf of all such owners based upon various
legal theories.
The Company has responded to the lawsuit and has asserted that the suit
is not a proper class action and that the named plaintiff is not an appropriate
class representative. Management of the Company and special counsel retained by
the Company believe that there are a number of meritorious defenses to the
claims being asserted. Among other defenses, the Company has asserted that many
of the matters which form the basis for the plaintiff's claims were resolved
adversely to certain of the members of the purported class in prior litigation
involving the predecessors in title to the Company's subsidiaries. Based upon a
review of the pleadings which have been filed, the Company believes that the
claims are without merit, and intends to vigorously defend the lawsuit.
In July 1996, Powerine was served with a suit concerning operations of
the Powerine Refinery. 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 on residents living nearby. The Company is also
named as a plaintiff in the suit but has not as yet been served with the
lawsuit.
The Company believes it is not properly a defendant in the lawsuit,
since it did not operate the Powerine Refinery. Furthermore, when the Company
sold Powerine in January 1996, the buyer assumed all liabilities, including
environmental liabilities.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-15-
<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: August 14, 1996 CASTLE ENERGY CORPORATION
/s/ Richard E. Staedtler
------------------------------
Chief Financial Officer
Chief Accounting Officer
-16-
<PAGE>
Exhibit 11.1
Page 1 of 1
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
1996 1995
---------------------------- -----------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
I. Actual shares outstanding at April 1 6,693,646 6,693,646 6,668,646 6,668,646
Stock issued during the period:
Options exercised 330 330
II. Weighted Equivalent Shares:
Assumed exercise of options and warrants 36,123 36,181 43,529
------------ ------------ ---------- ----------
III. Weighted average shares and equivalent shares 6,729,769 6,729,827 6,668,976 6,712,505
============ ============ ========== ==========
IV. Net income (loss) $ 1,816 $ 1,816 ($ 1,873) ($ 1,873)
============ ============ ========== ==========
V. Net income (loss) per share $ .27 $ .27 ($ .28) ($ .28)
============ ============ ========== ==========
</TABLE>
<PAGE>
Exhibit 11.1
Page 2 of 2
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------------------------------------------
1996 1995
---------------------------- -----------------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
I. Actual shares outstanding at October 1 6,693,646 6,693,646 7,627,646 7,627,646
Stock issued during the period:
Stock, net (919,290) (919,290)
Options exercised 4,542 4,542
II. Weighted Equivalent Shares:
Assumed exercise of options and warrants 24,233 35,526 58,944 47,313
Assumed conversion of debenture 25,650 25,650
----------- ----------- ----------- -----------
III. Weighted average shares and equivalent shares 6,717,879 6,729,172 6,797,492 6,785,861
=========== =========== =========== ===========
IV. Net income $ 12,444 $ 12,444 $ 12,247 $ 12,247
=========== =========== =========== ===========
V. Net income per share $ 1.85 $ 1.85 $ 1.80 $ 1.80
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Company's Form
10-Q for the nine months ended June 30, 1996 included in Part I. Financial
Information and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,320
<SECURITIES> 0
<RECEIVABLES> 5,412
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,399
<PP&E> 34,292
<DEPRECIATION> 12,463
<TOTAL-ASSETS> 100,045
<CURRENT-LIABILITIES> 31,046
<BONDS> 7,278
0
0
<COMMON> 3,347
<OTHER-SE> 50,734
<TOTAL-LIABILITY-AND-EQUITY> 100,045
<SALES> 57,082
<TOTAL-REVENUES> 57,082
<CGS> 31,675
<TOTAL-COSTS> 47,076
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,520
<INCOME-PRETAX> 12,444
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,444
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
</TABLE>
