<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, 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
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CASTLE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
- ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 May 1, 1996.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
Page #
------
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1996 (Unaudited)
and September 30, 1995...................................... 1
Consolidated Statements of Operations - Three Months
Ended March 31, 1996 and 1995 (Unaudited)................... 2
Consolidated Statements of Operations - Six Months Ended
March 31, 1996 and 1995 (Unaudited)......................... 3
Consolidated Statements of Cash Flows - Six Months Ended
March 31, 1996 and 1995 (Unaudited)......................... 4
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1995 and Six Months Ended March
31, 1996 (Unaudited)........................................ 5
Notes to the Consolidated Financial Statements (Unaudited)
............................................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.........14
Item 6. Exhibits and Reports on Form 8-K............................14
Signatures ..............................................................15
Exhibit 11.1 Statement Re: Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
<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,
1996 1995
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 2,965 $ 5,341
Restricted cash........................................................... 8,086 4,959
Accounts receivable....................................................... 9,337 5,641
Prepaid expenses and other current assets................................. 173 153
Deferred income taxes..................................................... 4,623 4,623
Estimated realizable value of discontinued net refining assets............ 6,855 10,803
----------- ---------
Total current assets.................................................... 32,039 31,520
Property, plant and equipment, net:
Natural gas transmission.................................................. 21,834 22,720
Furniture, fixtures and equipment......................................... 250 276
Oil and gas properties, net................................................... 16,275 17,410
Gas contracts, net............................................................ 29,828 34,515
Other assets, net............................................................. 372 463
Note receivable............................................................... 10,000 10,000
---------- ----------
Total assets............................................................ $110,598 $116,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 8,439 $ 12,080
Current portion of long-term debt - related party......................... 63 250
Accounts payable.......................................................... 8,294 4,715
Accrued expenses.......................................................... 1,971 3,284
Other liabilities......................................................... 3,083 3,323
Net refining liabilities retained......................................... 14,531 20,342
---------- ----------
Total current liabilities............................................... 36,381 43,994
Long-term debt................................................................ 14,295 23,616
Other long-term liabilities................................................... 83 83
Deferred income taxes......................................................... 7,574 7,574
----------- -----------
Total liabilities....................................................... 58,333 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........................................................... (17,398) (28,026)
---------- ----------
52,265 41,637
---------- ----------
Total liabilities and stockholders' equity.............................. $110,598 $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 March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.............................................................. $ 19,957 $ 21,134
----------- -----------
19,957 21,134
----------- -----------
Exploration and production:
Oil and gas sales...................................................... 2,330 1,670
Well operations........................................................ 137 111
----------- -----------
2,467 1,781
----------- -----------
22,424 22,915
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases.......................................................... 11,325 12,258
Operating costs........................................................ 176 216
General and administrative............................................. 284 206
Depreciation and amortization.......................................... 2,848 2,846
----------- -----------
14,633 15,526
----------- -----------
Exploration and production:
Oil and gas production................................................. 562 352
General and administrative............................................. 199 155
Depreciation, depletion and amortization............................... 559 701
----------- -----------
1,320 1,208
----------- -----------
Corporate general and administrative expenses............................ 1,106 928
----------- -----------
17,059 17,662
----------- -----------
Operating income............................................................. 5,365 5,253
----------- -----------
Other income (expenses):
Interest income.......................................................... 240 250
Other income............................................................. 39 7
Interest expense......................................................... (510) (1,052)
----------- -----------
(231) (795)
----------- -----------
Net income before provision for income taxes................................. 5,134 4,458
----------- -----------
Provision for (benefit of) income taxes related to continuing
operations:
State................................................................ (5)
Federal.............................................................. 1,761
----------- -----------
1,756
----------- -----------
Income from continuing operations............................................ 5,134 2,702
Income (loss) from discontinued refining operations less applicable
income taxes of $0 in 1996 and a tax benefit of $1,471 in 1995,
respectively............................................................. (2,666)
----------- -----------
Net income................................................................... $ 5,134 $ 36
============ ===========
<PAGE>
Net income (loss) per share:
Income (loss) per share from continuing operations - primary............. $ .77 $ .41
============ ===========
- fully diluted.................................................... $ .76 $ .41
============ ===========
Loss per share from discontinued refining operations
- primary.......................................................... ($ .40)
===========
- fully diluted.................................................... ($ .40)
===========
Net income per share - primary........................................... $ .77 $ .01
============ ===========
- fully diluted.................................................... $ .76 $ .01
============ ===========
Weighted average number of common and common equivalent
shares outstanding - primary......................................... 6,712,938 6,712,114
========== ===========
- fully diluted.................................................... 6,719,402 6,689,543
========== ===========
</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,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales .................................................... $ 35,797 $ 41,189
----------- -----------
35,797 41,189
----------- -----------
Exploration and production:
Oil and gas sales ............................................ 4,401 3,887
Well operations .............................................. 268 253
----------- -----------
4,669 4,140
----------- -----------
40,466 45,329
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ................................................ 20,066 23,580
Operating costs .............................................. 432 483
General and administrative ................................... 528 476
Depreciation and amortization ................................ 5,694 5,692
----------- -----------
26,720 30,231
----------- -----------
Exploration and production:
Oil and gas production ....................................... 1,296 1,033
General and administrative ................................... 419 358
Depreciation, depletion and amortization ..................... 1,190 1,448
----------- -----------
2,905 2,839
----------- -----------
Corporate general and administrative expenses .................. 2,250 2,222
----------- -----------
31,875 35,292
----------- -----------
Operating income ................................................... 8,591 10,037
----------- -----------
Other income (expenses):
Interest income ................................................ 471 507
Other income (expense) ......................................... 2,783 (48)
Interest expense ............................................... (1,217) (2,331)
----------- -----------
2,037 (1,872)
----------- -----------
Net income before provision for income taxes ....................... 10,628 8,165
----------- -----------
Provision for income taxes related to continuing operations:
State ...................................................... 4,175
Federal .................................................... 29,229
----------- -----------
33,404
----------- -----------
Income (loss) from continuing operations ........................... 10,628 (25,239)
Income from discontinued refining operations less applicable income
taxes of $0 and $26,240, in 1996 and 1995, respectively ........ 39,359
----------- -----------
Net income ......................................................... $ 10,628 $ 14,120
=========== ===========
<PAGE>
Net income (loss) per share:
Income (loss) per share from continuing operations - primary ... $ 1.58 ($ 3.65)
=========== ===========
- fully diluted .......................................... $ 1.58 ($ 3.65)
=========== ===========
Income per share from discontinued refining operations
- primary ................................................ $ 5.69
===========
- fully diluted .......................................... $ 5.69
===========
Net income per share - primary ................................. $ 1.58 $ 2.04
=========== ===========
- fully diluted .......................................... $ 1.58 $ 2.04
=========== ===========
Weighted average number of common and common equivalent
shares outstanding - primary ............................... 6,712,347 6,917,099
=========== ===========
- fully diluted .......................................... 6,719,361 6,801,318
=========== ===========
</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,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net cash flow provided by (used in) operating activities ............................. $ 19,108 ($ 38,719)
--------- ---------
Cash flows from investing activities:
Investment in refining plant ..................................................... (28,817)
Investment in oil and gas properties ............................................. (50) (4,028)
Investment in pipelines .......................................................... (48) (4)
Purchase of furniture, fixtures and equipment .................................... (241)
--------- ---------
Net cash used in investing activities ....................................... (98) (33,090)
--------- ---------
Cash flows from financing activities:
Proceeds of long-term debt ........................................................ 109,483
Repayment of long-term debt ....................................................... (22,687) (33,504)
Proceeds from exercise of stock options ........................................... 58
--------- ---------
Net cash provided by (used in) financing activities ......................... (22,687) 76,037
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................. (3,677) 4,228
Cash and cash equivalents - beginning of period ...................................... 6,710 18,118
--------- ---------
Cash and cash equivalents - end of period ............................................ $ 3,033 $ 22,346
========= =========
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
=========
Unrealized portion of estimated realizable value of discontinued net
refining assets ............................................................... $ 3,516
=========
</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> <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 ................. 10,628 10,628
---------- ---------- ---------- ---------- ----------
Balance - March 31, 1996 ... 6,693,646 $ 3,347 $ 66,316 ($ 17,398) $ 52,265
========== ========== ========== ========== ==========
</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 six month periods ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1996. 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 six month periods ended March 31, 1996 and 1995
and for a fair statement of financial position at March 31, 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
Company retired the assets of the Powerine Refinery. On September 29, 1995,
Powerine Oil Company ("Powerine"), the refining subsidiary owning the Powerine
Refinery, sold (for legal purposes) substantially all of the 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 also ceased at the Indian Refinery
and the Company retired the plant assets of the Indian Refinery. On December 12,
1995, the Company sold the plant assets of the Indian Refinery to American
Western 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 Indian Refining Limited
Partnership ("IRLP"), the owner of the Indian Refinery, including employee
pension liabilities and all environmental liabilities, in conjunction with the
sale. The Company also sold certain precious metal catalysts to American Western
for a note for $1,803.
As a result of the discontinuance of refining operations, all assets
and liabilities related to the refining segment have been netted. The estimated
realizable value of net 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 the refining 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 March 31, 1996 is as follows:
Estimated
realizable value of Net refining
discontinued net liabilities
refining assets retained
------------------- ------------
Balance - October 1, 1995................. $10,803 $20,342
Cash proceeds from refinery sales......... (3,948) (3,516)
Cash payment from parent.................. (801)
Other..................................... (1,494)
-------- --------
Balance - March 31, 1996.................. $ 6,855* $14,531
======== =======
*Consists of $5,000 secured note and $1,803 platinum note plus interest
due from American Western.
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
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
should fail to perform. On December 23, 1994, Shell filed suit in the United
States District Court for the Northern District of Illinois against IRLP and
MGRM (the "Shell Litigation"). The complaint alleged that MGRM failed to provide
Shell with adequate assurances, pursuant to a request under the Illinois
Commercial Code, concerning its role as "alternate purchaser" under the LTSA,
and that as a result, MGRM repudiated the LTSA pursuant to provisions of the
Illinois Commercial Code. The complaint further alleged that the LTSA should be
terminated because its purpose has been frustrated and the performance 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 adds a claim for
$10,000 in damages based upon alleged undercharges and other breaches of the
LTSA. Management believes the claim of Shell is without merit.
On December 12, 1995, IRLP sold the Indian Refinery to American
Western. As part of the sale, American Western assumed all liabilities and
expenses associated with the LTSA litigation. American Western is currently
defending this litigation and has filed a counterclaim against Shell in the
amount of $100,000.
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 Company's note from MG
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
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.
On September 8, 1995, the Company filed its Statement of Claim and
Memorandum. On December 6, 1995, MG filed its Notice of Defense and Response to
Claimant's Statement of Claim and Memorandum. The Company filed a reply on
February 14, 1996 and the parties are proceeding with discovery as to the amount
of damages. The Company expects the arbitration to be settled during the fourth
quarter of fiscal 1996.
In January 1996, MG did not pay interest on the $10,000 note when such
interest was due. As a result, the entire note is due to be paid to the escrow
account for the Powerine Arbitration. The Company has demanded that MG pay the
entire note.
Swap Agreement
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between 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, expects to prevail and expects to recover its $707
receivable.
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 March 1996, the Company received a commitment letter from a bank for
a credit facility of $3,800. The credit facility is to be 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 to be payable as a term
loan over seventeen months. The Company and the bank are currently concluding
the documentation of the credit facility.
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
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
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, the closing of
such financing has still not occurred. As a result, the Company's subsidiary,
which has a first security interest in the platinum, is considering alternatives
with respect to the collection of the note. The Company estimates that, as of
May 1, 1996, the market value of the collateral was in excess of $2,200 and
accordingly does not expect a loss in liquidating the note.
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 is considering
options available to it under the note and related agreements, including
foreclosure on the assets securing the note. If American Western does not pay
the note, IRLP will not have funds to pay its trade creditors. 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.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
As noted previously, the Company 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.
Revenues
Gas sales from natural gas marketing decreased $5,392 or 13.2% from
the first half of fiscal 1995 to the first half of fiscal 1996. The decrease was
attributable to two factors: a decrease in the annual volumes Lone Star is
required to take and the fact that deliveries under the 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 volumes 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. Lone Star's deliveries in
February and March 1996 approximated 23.5% of the annual volume that Lone Star
is required to purchase for the contract year ending January 31, 1997. Had Lone
Star taken the required annual volumes ratably during these months such volumes
would have aggregated only 16.7% of annual required volumes. The result is that
monthly gas sales to Lone Star are expected to be less than the annual monthly
average for the remainder of both the Company's fiscal year ended September 30,
1996 and the Lone Star Contract year ended January 31, 1997, although deliveries
by month within these periods will vary in accordance with Lone Star's seasonal
demand.
Exploration and Production
Oil and gas sales increased $514 or 13.2% from the six months ended
March 31, 1995 to the six months ended March 31, 1996. The increase is comprised
of two offsetting factors. Production volumes and thus oil and gas sales
declined approximately 10% 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 25% during the period due
to short gas supplies and cold weather - especially in January and February
1996.
-11-
<PAGE>
Expenses
Natural Gas Marketing and Transmission
Gas purchases for natural gas marketing decreased $3,514 or 14.9%
from the first half of fiscal 1995 to the first half of fiscal 1996. This
decrease compares to a 13.2% decrease in natural gas sales for the same periods.
For the six months ended March 31, 1995, gas purchases comprised 57.2% of gas
sales versus only 56.1% of gas sales for six months ended March 31, 1996. The
decrease in gas purchases as a percentage of gas sales is attributable to
non-recurring reduction of prior periods' gas purchasing liabilities.
Exploration and Production
Oil and gas production (lease operating) expenses increased $263 or
25.5% for the six months ended March 31, 1996. For the six months ended March
31, 1995 oil and gas production expenses comprised 26.6% of oil and gas sales
versus 29.4% of oil and gas sales for the six months ended March 31, 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 $258 or 17.8% from
the first half of fiscal 1995 to the first half of fiscal 1996. Such decrease
parallels the decrease in production.
Other Income (Expenses)
Other income increased $2,831. 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. There
was no counterpart to this recovery in fiscal 1995.
Interest expense decreased $1,114 or 47.8% from the first half of
fiscal 1995 to the first half of fiscal 1996. The decrease is attributable to
the decrease in debt owed to General Electric Capital Corporation ("GECC"), the
Company's natural gas marketing and transmission lender. This debt constituted
over 95% of the Company's 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 six
months ended March 31, 1995 has been determined pursuant to "Financial
Accounting Standards 109 -- Accounting for Income Taxes" ("FAS/109"). The
$33,404 provision against pretax income from continuing operations of $8,165
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
-12-
<PAGE>
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 six month period ended March
31, 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
The Company previously indicated that its cash deficit for the period
March 1, 1996 to September 30, 1996 was approximately $2,875 (see Item 7 to Form
10-K for the year ended September 30, 1995). As of April 30, 1996, the situation
had not significantly changed: the Company's projected cash shortfall through
September 30, 1996 approximated $2,750 and is essentially comprised of
liabilities of CORE that the Company is obligated to reimburse to CORE when CORE
settles and pays such liabilities and refining debt for which the Company has
pledged its exploration and production assets. (The Company is currently liable
for approximately $4,500 in liabilities but expects to recover approximately
$1,850 from its platinum note due from American Western). Subsequently, the
Company received a commitment for $3,800 from a bank. The Company and the bank
are currently negotiating the documentation for the commitment and the Company
anticipates that the commitment will be funded in May 1996. The Company believes
that the funds from the bank commitment and non-committed funds generated by the
Company's exploration and production operations will meet the Company's ongoing
cash requirements until the Company has repaid or refinanced its natural gas
marketing and transmission debt. All cash flow from natural gas marketing and
transmission operations is dedicated to this debt and thus not available for
other corporate requirements/investments. The Company anticipates that this debt
will be repaid by January 1997 and then the Company will receive the cash flow
from natural gas marketing and transmission operations - currently approximately
$22,500 per year. The Lone Star Gas Contract, from which most of this cash flow
is derived, expires May 31, 1999.
The Company has also received a preliminary commitment from the bank
for a $30,000 facility. Under the terms of such facility the proceeds would be
used to refinance the natural gas marketing and transmission debt and the $3,800
commitment 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.
Although the Company anticipates that it can close the $30,000
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. There can be no
assurance, however, that such will be the case.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on April 29, 1996.
Proxies were solicited pursuant to the Notice of Annual Meeting of Stockholders,
dated April 1, 1996 and the accompanying Proxy Statement. A total of 6,693,646
shares were eligible to vote of which 4,959,799 were present in person or by
proxy.
Martin R. Hoffmann was elected to serve as a director until the 1999
Annual Meeting and the number of votes with respect to Mr. Hoffmann was
4,857,492 votes for his election and 102,307 votes withheld for his election.
At the Annual Meeting, the stockholders also approved the appointment of
Price Waterhouse, LLP as the Company's independent accountants for the fiscal
year ending September 30, 1996 by a vote of 4,863,361 for such appointment,
95,525 against and 913 abstentions.
In addition to the above, Joseph L. Castle II, Sidney F. Wentz and
William S. Sudhaus continued on the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibit:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-14-
<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 9, 1996 CASTLE ENERGY CORPORATION
/s/ Richard E. Staedtler
----------------------------------------
Chief Financial Officer
Chief Accounting Officer
-15-
<PAGE>
Exhibit 11.1
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,
-------------------------------------------------------
1996 1995
-------------------------- -------------------------
Fully Fully
Primary Diluted Primary Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. Actual shares outstanding at September 30 6,693,646 6,693,646 7,627,646 7,627,646
Stock issued during the period:
Stock, net (894,484) (894,484)
Options exercised 1,648 1,648
II. Weighted Equivalent Shares:
Assumed exercise of options and warrants 18,701 25,715 143,839 28,058
Assumed conversion of debenture 38,450 38,450
----------- ----------- ----------- -----------
III. Weighted average shares and equivalent shares 6,712,347 6,719,361 6,917,099 6,801,318
=========== =========== =========== ===========
IV. Net income:
Net income before adjustment $ 10,628 $ 10,628 $ 14,120 $ 14,120
Assumed interest savings, net of tax, "as if,"
the convertible debenture had been exercised
and debt had been retired utilizing proceeds
of the exercise of options and warrants 6 6
----------- ----------- ----------- -----------
Adjusted net income $ 10,628 $ 10,628 $ 14,126 $ 14,126
=========== =========== =========== ===========
V. Net income per share $ 1.58 $ 1.58 $ 2.04 $ 2.08(A)
=========== =========== =========== ===========
</TABLE>
(1) Fully diluted earnings per share is not presented as it is anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Company's
Consolidated Financial Statements for the fiscal period ended March 31, 1996
included in Part 1. Financial Information and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,051
<SECURITIES> 0
<RECEIVABLES> 9,337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,039
<PP&E> 28,492
<DEPRECIATION> 6,408
<TOTAL-ASSETS> 110,598
<CURRENT-LIABILITIES> 36,381
<BONDS> 14,295
0
0
<COMMON> 3,347
<OTHER-SE> 48,918
<TOTAL-LIABILITY-AND-EQUITY> 110,598
<SALES> 40,466
<TOTAL-REVENUES> 40,466
<CGS> 20,066
<TOTAL-COSTS> 31,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,217
<INCOME-PRETAX> 10,628
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,628
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
</TABLE>
