<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, 1997
-------------------------------------------------
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
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer 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: 4,727,296 shares of
Common Stock, $.50 par value outstanding as of August 11, 1997.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
Page #
Part I. Financial Information
---------------------
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1997
(Unaudited) and September 30, 1996.............. 1
Consolidated Statements of Operations -
Three Months Ended June 30, 1997 and 1996
(Unaudited)..................................... 2
Consolidated Statements of Operations -
Nine Months Ended June 30, 1997 and 1996
(Unaudited)..................................... 3
Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 1997 and 1996
(Unaudited)..................................... 4
Consolidated Statements of Stockholders'
Equity - Nine Months Ended June 30, 1997
(Unaudited) and Year Ended September 30, 1996... 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 1. Legal Proceedings............................... 22
Item 6. Exhibits and Reports on Form 8-K................ 22
Signature ............................................................. 23
<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,
1997 1996
-------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $42,573 $ 3,457
Restricted cash........................................................... 774 1,743
Accounts receivable....................................................... 5,754 10,217
Prepaid transportation expense............................................ 1,500
Prepaid insurance and other current assets................................ 97 73
Deferred income taxes..................................................... 2,572 2,373
Note receivable........................................................... 10,000
Estimated realizable value of discontinued net refining assets............ 901 6,288
-------- --------
Total current assets.................................................... 64,171 24,151
Property, plant and equipment, net:
Natural gas transmission.................................................. 20,987
Furniture, fixtures and equipment......................................... 188 222
Oil and gas properties, net................................................... 2,410 15,014
Gas contracts, net............................................................ 18,186 25,142
Prepaid transportation expense................................................ 1,419
Deferred income taxes......................................................... 1,557 5,343
Other assets, net............................................................. 371
Note receivable............................................................... 10,000
-------- --------
Total assets............................................................ $ 87,931 $101,230
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 8,172
Dividends payable......................................................... $ 738
Accounts payable.......................................................... 3,718 3,817
Accrued expenses.......................................................... 1,998 1,875
Other liabilities......................................................... 2,128 3,660
Net refining liabilities retained......................................... 3,832 11,079
-------- --------
Total current liabilities............................................... 12,414 28,603
Long-term debt................................................................ 5,834
Other long-term liabilities................................................... 84 82
-------- --------
Total liabilities....................................................... 12,498 34,519
-------- --------
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; 6,792,396
and 6,693,646 shares issued and outstanding in 1997 and
1996, respectively...................................................... 3,396 3,347
Additional paid-in capital.................................................... 66,991 66,316
Retained earnings (deficit)................................................... 21,819 (2,952)
-------- --------
92,206 66,711
Treasury stock at cost - 1,470,100 shares in 1997....................... (16,773) -
-------- --------
75,433 66,711
-------- --------
Total liabilities and stockholders' equity.............................. $ 87,931 $101,230
======== ========
</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,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales.......................................................... $ 13,944 $ 14,474
Transportation..................................................... 7
----------- -----------
13,951 14,474
----------- -----------
Exploration and production:
Oil and gas sales.................................................. 1,227 2,065
Well operations.................................................... 87 77
----------- -----------
1,314 2,142
----------- -----------
15,265 16,616
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases...................................................... 8,247 9,748
Operating costs.................................................... 104 360
General and administrative......................................... 40 218
Transportation..................................................... 81
Depreciation and amortization...................................... 2,590 2,851
----------- -----------
11,062 13,177
----------- -----------
Exploration and production:
Oil and gas production............................................. 498 565
General and administrative......................................... 351 156
Depreciation, depletion and amortization........................... 563 623
----------- -----------
1,412 1,344
----------- -----------
Corporate general and administrative expenses........................ 761 680
----------- -----------
13,235 15,201
----------- -----------
Operating income......................................................... 2,030 1,415
----------- -----------
Other income (expense):
Gain on sale of assets............................................... 19,667
Interest income...................................................... 409 226
Other income (expense)............................................... (22) 478
Interest (expense)................................................... (285) (303)
----------- -----------
19,769 401
----------- -----------
Net income before provision for income taxes............................. 21,799 1,816
----------- -----------
Provision for income taxes:
State............................................................ 49
Federal.......................................................... 1,387
----------- -----------
1,436
----------- -----------
Net income............................................................... $ 20,363 $ 1,816
=========== ===========
Net income per share:
Primary.......................................................... $ 3.72 $ .27
=========== ===========
Fully diluted.................................................... $ 3.71 $ .27
=========== ===========
Dividend declared per share.............................................. $ .15 -
=========== ===========
Weighted average number of common and common equivalent shares outstanding:
Primary.......................................................... 5,467,473 6,729,769
=========== ===========
Fully diluted.................................................... 5,482,305 6,729,827
=========== ===========
</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,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ............................................................ $ 52,736 $ 50,271
Transportation ....................................................... 7
----------- -----------
52,743 50,271
----------- -----------
Exploration and production:
Oil and gas sales .................................................... 6,003 6,466
Well operations ...................................................... 322 345
----------- -----------
6,325 6,811
----------- -----------
59,068 57,082
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ........................................................ 32,322 29,814
Operating costs ...................................................... 472 792
General and administrative ........................................... 717 746
Transportation ....................................................... 81
Depreciation and amortization ........................................ 8,274 8,545
----------- -----------
41,866 39,897
----------- -----------
Exploration and production:
Oil and gas production ............................................... 1,792 1,861
General and administrative ........................................... 966 575
Depreciation, depletion and amortization ............................. 1,462 1,813
----------- -----------
4,220 4,249
----------- -----------
Corporate general and administrative expenses .......................... 2,543 2,930
----------- -----------
48,629 47,076
----------- -----------
Operating income ........................................................... 10,439 10,006
----------- -----------
Other income (expense):
Gain on sale of assets ................................................. 19,667
Interest income ........................................................ 844 697
Other income (expense) ................................................. (73) 3,261
Interest (expense) ..................................................... (1,038) (1,520)
----------- -----------
19,400 2,438
----------- -----------
Net income before provision for income taxes ............................... 29,839 12,444
----------- -----------
Provision for income taxes:
State .............................................................. 129
Federal ............................................................ 4,201
----------- -----------
4,330
-----------
Net income ................................................................. $ 25,509 $ 12,444
=========== ===========
Net income per share:
Primary ............................................................ $ 4.19 $ 1.85
=========== ===========
Fully diluted ...................................................... $ 4.18 $ 1.85
=========== ===========
Dividend declared per share ................................................ $ .15 --
=========== ===========
Weighted average number of common and common equivalent shares outstanding:
Primary ............................................................ 6,087,803 6,717,879
=========== ===========
Fully diluted ...................................................... 6,106,838 6,729,172
=========== ===========
</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,
1997 1996
---- ----
<S> <C> <C>
Net cash flow provided by operating activities .................................. $ 70,649 $ 26,477
-------- --------
Cash flows from investing activities
Investment in oil and gas properties ......................................... (1,000) (50)
Investment in pipelines ...................................................... (58) (276)
-------- --------
Net cash used in investing activities ................................... (1,058) (326)
-------- --------
Cash flows from financing activities:
Proceeds of long-term debt .................................................... 13,986 3,800
Payment of debt issuance costs ................................................ (420) (388)
Repayment of long-term debt ................................................... (27,992) (32,644)
Acquisition of treasury stock ................................................. (16,773)
Proceeds from exercise of stock options ....................................... 724
-------- --------
Net cash used in financing activities ................................... (30,475) (29,232)
-------- --------
Net increase (decrease) in cash and cash equivalents ............................. 39,116 (3,081)
Cash and cash equivalents - beginning of period .................................. 3,457 5,341
-------- --------
Cash and cash equivalents - end of period ........................................ $ 42,573 $ 2,260
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount Total
------ ------ --------- ----------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1995.......... 6,693,646 $3,347 $66,316 ($28,026) $41,637
Net income............................ 25,074 25,074
--------- ------ ------- -------- --------
Balance - September 30, 1996.......... 6,693,646 3,347 66,316 (2,952) 66,711
Options exercised..................... 98,750 49 675 724
Stock acquired........................ 1,470,100 ($16,773) (16,773)
Dividends declared.................... (738) (738)
Net income............................ 25,509 25,509
--------- ------ ------- -------- ---------- -------- --------
Balance - June 30, 1997 6,792,396 $3,396 $66,991 $21,819 1,470,100 ($16,773) $75,433
========= ====== ======= ======= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 1 - Basis of Preparation
- -----------------------------
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three and nine month periods ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1997 or for future fiscal periods. These unaudited consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996. 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, 1997 and 1996
and for a fair statement of financial position at June 30, 1997.
Note 2 - September 30, 1996 Balance Sheet
- -----------------------------------------
The amounts presented in the balance sheet as of September 30, 1996
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, 1996.
Note 3 - Sale of Texas Oil and Gas Properties and Pipeline
- ----------------------------------------------------------
On May 30, 1997, the Company consummated the sale of its Texas oil and
gas properties and pipeline to Union Pacific Resources Company ("UPRC") and
Union Pacific Intrastate Pipeline Company ("UPIPC"), respectively. The effective
date of the sale was May 1, 1997. The assets sold include approximately 8150 net
acres, 115 producing oil and gas wells and a 74-mile pipeline which gathers gas
from the producing wells and delivers it to a pipeline owned by Lone Star Gas
Company ("Lone Star"). The proved reserves associated with the oil and gas
properties that were sold comprised approximately 84% of the Company's proved
reserves. The Company still owns its non-Texas oil and gas properties and its
gas sales contract with Lone Star. That contract expires on May 31, 1999.
The purchase price received by the Company was $54,759 and consisted of
$50,184 cash, $1,575 of liabilities assumed by UPRC and $3,000 of prepaid gas
transportation expense. The gas transportation prepayment relates to natural gas
that the Company is required to supply to Lone Star through May 31, 1999.
Although the purchase price will be increased or decreased through post closing
adjustments not later than November 15, 1997, the net amount of such post
closing adjustments is expected to be immaterial.
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
As a result of the sale, the Company realized a gain of $35,337 on the
sale of the oil and gas properties and a loss of $15,670 on the sale of the
pipeline, resulting in a net gain of $19,667.
Note 4 - Discontinued Operations
- --------------------------------
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets. In addition,
Powerine Oil Company ("Powerine"), one of the Company's former refining
subsidiaries, merged into a subsidiary of another company and is no longer a
subsidiary of the Company. The Company's remaining refining subsidiaries own no
refining assets and are in the process of liquidation. One of those
subsidiaries, Indian Oil Company ("IOC"), filed for bankruptcy in March 1997.
(See "Liquidity and Capital Resources" under Item 2 to this Form 10-Q.) As a
result of the foregoing, the Company has accounted for its refining operations
as discontinued operations.
Note 5 - Contingencies/Litigation
- ---------------------------------
Powerine Arbitration
One of the Company's subsidiaries ("CEC, Inc.") owns a $10,000 note
(the "MG Note") due from Metallgesellschaft Corp. ("MG"), a former related
party, as a result of a global settlement between the Company and MG in October
of 1994. The MG Note is due October 14, 1997. CEC, Inc. also has made a $10,000
note to MG (the "CEC Note"). By its terms, the CEC Note matures on October 14,
1997, subject to the provisions discussed below. In April 1996, CEC, Inc. was
assigned Powerine's claim against an MG subsidiary in return for paying Powerine
$10,000. The claim relates to discontinued operations and has been submitted to
binding arbitration between CEC, Inc. and MG pursuant to the terms of an April
13, 1995 Payoff, Loan and Pledge Agreement among the Company, Powerine, MG and
certain affiliates (the "Payoff Agreement").
On May 29, 1997, the arbitrator issued a written opinion finding for
CEC, Inc. on all liability issues and directing the parties to calculate the
amount due to CEC, Inc. Pursuant to the Payoff Agreement, the Arbitrator's award
is limited to $10,700. The amount awarded, plus accrued interest, is first to be
offset against the CEC, Inc. Note, with any remaining cash to be paid to CEC,
Inc. Although MG may be disputing the computation of interest on the award, the
Company's management and special counsel believe that the CEC, Inc. Note should
be entirely offset by the Arbitrator's award and that there will be cash
remaining of approximately $700. In addition, CEC, Inc. is still owed the MG
Note of $10,000. The net recovery expected by the Company is approximately
$10,200 since the Company has already incurred legal and other costs related to
the arbitration of approximately $500. Since the Company has carried the net
receivable on its books at $10,000, the principal balance of the MG Note, it
expects to record a gain when the arbitration award is finalized and collected.
To the extent that any resulting gain relates to discontinued refining
operations, any impact will be considered with and offset against other items
impacting discontinued operations.
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
SWAP Agreement - MGNG
Indian Refining I Limited Partnership ("IRLP"), another of the
Company's subsidiaries, is involved with litigation with MG Natural Gas Corp.
("MGNG"), a subsidiary of MG. The litigation involves competing claims by both
parties concerning a terminated natural gas swap agreement between MGNG and
IRLP. The litigation is related to the Powerine Arbitration Litigation (see
above) and IRLP expects this litigation to be settled at the same time as or
shortly after the Powerine Arbitration litigation is settled. If IRLP prevails,
it expects to recover $703. If MGNG prevailed, IRLP would have been liable for
up to $653. The amount at stake is accordingly $1,356. IRLP has recorded neither
an asset nor a liability as a result of this litigation. Therefore, the amount
at which it is resolved will directly impact its discontinued operations. The
impact of resolution will be considered with and be offset against other items,
if any, impacting discontinued operations.
As a result of the favorable decision received in the Powerine
Arbitration (see above), IRLP expects to recover $703 plus interest. MGNG has
claimed that such amounts are not due until the Powerine Arbitration proceeds
are received. The Powerine Arbitration proceeds are expected to be received not
later than October 1997. Such recovery will be recorded, however, when and if
actual recovery occurs.
Larry Long Litigation
In May 1996, Larry Long, representing himself and allegedly "others
similarly situated," filed suit against the Company, three of the Company's
natural gas marketing and transmission and exploration and production
subsidiaries, Atlantic Richfield Company ("ARCO"), B&A Pipeline Company (a
former subsidiary of ARCO), and MGNG in the Fourth Judicial District Court of
Rusk County, Texas. The plaintiff originally claimed, among other things, that
the defendants underpaid non-operating working interest owners, royalty interest
owners, and overriding royalty interest owners with respect to gas sold to Lone
Star. Although no amount of actual damages was specified in the plaintiff's
initial pleadings, it appeared that, based upon the volumes of gas sold to Lone
Star, the plaintiff may have been seeking actual damages in excess of $40,000.
After some initial discovery, the plaintiff's pleading were
significantly amended. Another purported class representative, Travis Crim, was
added as a plaintiff, and ARCO, B&A Pipeline Company and MGNG were dropped as
defendants. Although it is not completely clear from the amended petition, the
plaintiffs have apparently now limited their proposed class of plaintiffs to
royalty owners and overriding royalty owners in leases owned by the Company's
exploration and production subsidiary limited partnership. In amending their
pleadings, the plaintiffs revised their basic claim to seeking royalties on
certain operating fees paid by Lone Star to the Company's natural gas marketing
subsidiary limited partnership. No hearing has been held on the plaintiffs'
request for class certification, however. Furthermore, no hearing is presently
scheduled, and additional discovery will need to be conducted before any class
certification hearing is held.
Based upon the revised pleadings, management of the Company determined
that the possible exposure of the Company and its subsidiary limited
partnerships, were they to lose the case, for all gas
-8-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
sold to Lone Star in the past and in the future was less than $3,000 in actual
damages. However, the Company recently sold all of its Rusk County oil and gas
properties to UPRC (see Note 3). The sale to UPRC effectively removed any
possibility of exposure by the Company or its subsidiary limited partnerships to
claims for additional royalties with respect to future production. Management
continues to believe that the plaintiffs' claims are without merit and intends
to vigorously fight the claims which have been asserted by the plaintiffs.
Moreover, management believes that the recent sale to UPRC has reduced the total
exposure of the Company and its subsidiary limited partnerships to less than
$2,000 in actual damages if they were to lose the case.
Powerine Class Action Lawsuit
In July 1996, Powerine was served with a suit concerning operations of
the Powerine Refinery in the Superior Court of the State of California in Los
Angeles, California. The suit claims the Powerine Refinery is a public nuisance,
that it has released excessive toxic and noxious emissions and caused physical
and emotional distress and property damage to residents living nearby. The
Company was also named as a defendant in the suit. In March 1997, the Company
was served with the lawsuit.
In April 1997, the Company filed a notion to quash the plaintiffs'
summons based upon the lack of jurisdiction. On May 2, 1997, the court granted
the Company's motion. As a result, the Company is no longer a defendant in the
Powerine Class Action Lawsuit.
Note 6 - 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
(Expense)" in the Consolidated Statement of Operations.
Note 7 - Repayment Debt
- -----------------------
The Company used $13,007 of the proceeds from the sale of its oil and
gas properties and pipeline (see Note 3) to repay its outstanding revolving
credit debt ($12,907) and accrued interest ($100). As a result of this
repayment, the Company's remaining oil and gas assets and gas contracts are not
subject to lender liens.
Note 8 - Share Repurchase Program
- ---------------------------------
The Company's Board of Directors has authorized the Company to purchase
up to 2,500,000 of its outstanding shares of common stock on the open market. As
of June 30, 1997, 1,470,100 shares had been repurchased. Subsequent to June 30,
1997, the Company purchased an additional 595,000 shares.
On June 30, 1997, the Company's Board of Directors approved a dividend
policy of $.60 per share per year, payable quarterly. The dividend policy
remains in effect until rescinded or changed by
-9-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
the Board of Directors. The first quarterly dividend, $.15 per share, was paid
on July 15, 1997 to holders of record as of July 11, 1997.
Note 9 - Accounting Pronouncements
- ----------------------------------
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS")
for entities with publicly held common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings Per Share," and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS, and requires dual presentations of basic and diluted EPS on the
face of the income statement. SFAS No. 128 is effective for fiscal years ending
after December 15, 1997, and early adoption is not permitted. The Company has
not completed its calculations of EPS data for the current fiscal year under
SFAS No. 128; however, management of the Company does not anticipate the
adoption of this pronouncement will have a material impact on the Company's
results of operations.
Derivative Financial Instruments
- --------------------------------
The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market price of natural gas. Commodity derivatives
utilized as hedges of natural gas are futures contracts. Natural gas basis swaps
are sometimes used to hedge the basis differential between the derivative
financial instrument index price and the natural gas field price. In order to
qualify as a hedge, price movements in the underlying commodity derivative must
be highly correlated with the hedged commodity.
Gains and losses on futures contracts that qualify as a hedge of firmly
committed or anticipated purchases and sales of natural gas are deferred on the
balance sheet and credited or debited to cost of gas purchased and recognized in
operating cash flows when the related hedged transaction occurs. There were no
such deferred gains or losses at June 30, 1997 or September 30, 1996. Gains or
losses on derivative financial instruments that do not qualify as a hedge are
recognized in income currently.
As a result of hedging transactions, the cost of gas purchased was
reduced by $73 and zero in the third quarter of 1997 and 1996, respectively.
During the first nine months of 1997, the cost of gas purchased was reduced by
$580 as a result of these transactions.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. As a result, management's discussion and
analysis focuses primarily on the Company's continuing operations -- natural gas
marketing and transmission and exploration and production. All references herein
to dollars are in thousands.
As noted in Footnote 3 to the June 30, 1997 financial statements, the
Company sold approximately 84% of its proved oil and gas reserves and its Texas
pipeline on May 30, 1997. As a result, the operations of the assets sold
impacted operations for eight of the nine months in fiscal 1997 versus all nine
months in fiscal 1996.
The Company desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and has included a
discussion of risk factors related to Management's Discussion and Analysis of
Financial Condition and Results of Operations. The discussion and analysis below
include forward-looking data that are based upon management's estimates,
assumptions and projections. Important factors such as the risk factors listed
below could cause results to differ materially from those expected by
management.
Natural Gas Marketing and Transmission
Gross Margin
A comparison of the gross margins earned by the Company's natural gas
marketing and transmission segment is as follows:
<TABLE>
<CAPTION>
Lone
Star MGNG Intercompany
Contract Contract Other Eliminations Consolidated
---------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended June 30, 1997
Gas Sales ............................. $ 52,491 $ 3,668 ($ 3,423) $ 52,736
Gas purchases ......................... (31,626) (4,119) 3,423 (32,322)
--------- --------- --------- --------
Gross margin .......................... $ 20,865 ($ 451) -- $ 20,414
========= ========= ========= ========
Nine Months Ended June 30, 1996
Gas Sales ............................. $ 53,509 $ 202 $ 184 ($ 3,624) $ 50,271
Gas purchases ......................... (33,041) (202) (195) 3,624 (29,814)
--------- --------- --------- -------- ---------
Gross margin .......................... $ 20,468 -- ($ 11) -- $ 20,457
========= ========= ========= ======== =========
</TABLE>
Lone Star Contract
Natural gas sales under the Lone Star Contract (see below) decreased
$1,018 or 1.9% from the first nine months of fiscal 1996 to the first nine
months of fiscal 1997. Under the Company's long-term gas sales contract with
Lone Star ("Lone Star Contract"), the price received for gas is essentially
fixed through May 31, 1999. The variance in gas sales, therefore, is almost
entirely attributable to the volumes of gas delivered. Although the volumes sold
to Lone Star annually are essentially fixed (the Lone Star
-11-
<PAGE>
Contract has a take-or-pay provision), the Lone Star Contract year is from
February 1 to January 31 whereas the Company's fiscal year is from October 1 to
September 30. Furthermore, although the volumes to be taken by Lone Star in a
given contract year are fixed, there is no provision requiring fixed monthly or
daily volumes and deliveries accordingly vary with Lone Star's seasonal and peak
demands. Such variances have been significant. As a result, Lone Star
deliveries, although fixed for a contract year, may be skewed and not
proportional for the Company's fiscal periods.
For the nine months of fiscal 1997 deliveries and sales to Lone Star
exceeded by approximately 10% those which would have resulted if daily
deliveries had been fixed and equal. Since annual deliveries and sales have
historically approximated the annual volumes Lone Star is required to take under
the Lone Star Contract, it is expected that deliveries and sales for the last
quarter of fiscal 1997 will average less than those which would have resulted if
daily deliveries were fixed and equal.
Gas purchases for the Lone Star Contract decreased $1,415 or 4.3% from
the first nine months of fiscal 1996 to the first nine months of fiscal 1997.
For the nine months ended June 30, 1996 gas purchases comprised 61.7% of gas
sales versus 60.3% of gas sales for the nine months ended June 30, 1997. From
1996 to 1997 the gross margin increased $397 or 1.9%. During the same periods
the gross margin percentage ((gas sales - gas purchases) as a percentage of gas
sales) increased 1.4% from 38.3% for the nine months ended June 30, 1996 to
39.7% for the nine months ended June 30, 1997.
The decrease in gas purchases as a percentage of gas sales and
resulting increase in gross margin percentage results primarily from the
replacement of gas supply contracts with outside interests in wells operated by
the Company on April 30, 1997. The expiring contracts called for gas prices
substantially in excess of market prices whereas the replacement gas contracts
are at market prices, resulting in the decreased costs to the Company for a
portion of the gas it supplies to Lone Star. This was offset to a minor degree
by a $251 non-recurring favorable gas purchase adjustment in the first quarter
of fiscal 1996 which had no counterpart in fiscal 1997.
As a result of the sale of the Company's Texas oil and gas properties
to UPRC (see Note 3 to the June 30, 1997 financial statements), the Company is
now purchasing gas for the Lone Star Contract from UPRC. Such gas purchases
currently approximate 23% of gas volumes needed for the Lone Star Contract
although this percentage is expected to decrease when Lone Star deliveries
increase. At the present time, the Company has not hedged the gas supplies it
purchases from UPRC and outside interests and thus remains exposed to price
risk. If gas prices increase, the Company's cost of gas will increase and its
gross margin will decrease because the price at which it sells gas to Lone Star
is essentially fixed.
MGNG Contract
One of the Company's natural gas marketing subsidiaries is a party to a
gas sales contract with MGNG. Pursuant to the terms of the contract, the
subsidiary is required to sell to MGNG 7,356 MMBtu's (British thermal units) of
natural gas at a fixed price ratably over the period from June 1, 1996 to May
31, 1999. The fixed price for the gas sold to MGNG is significantly less than
the fixed price of gas sold to Lone Star. For the nine months ended June 30,
1997, the Company realized a negative gross margin of $451 on gas sales to MGNG.
The negative margin resulted because the spot (market) prices paid by the
Company for gas, less hedging adjustments where applicable, exceeded the fixed
price received by the Company from MGNG under the contract. The Company has not
yet hedged most of the remaining gas purchase requirement for this contract. As
a result, the Company may continue to realize a negative gross margin on this
contract in the future unless gas purchases can be made or hedged
-12-
<PAGE>
at a cost equal to or below the fixed gas sales price to MGNG. Future gross
margins will accordingly depend primarily on the future spot (market) prices of
gas and the results of the Company's ability to hedge its commitments at
favorable prices. For the month of June 1996, the Company realized a zero gross
margin on this contract.
Other Gas Sales
In the first four months of fiscal 1996, the Company recorded gas sales
of $184 to outside parties. Since February 1996, the Company has not sold gas to
outside parties other than Lone Star and MGNG.
Operating Costs
Operating costs decreased $320 or 40.4% from the first nine months of
fiscal 1996 to the first nine months of fiscal 1997. Approximately $88 of the
decrease is due to the sale of the Texas pipeline on May 30, 1997 (see Note 3 to
the June 30, 1997 financial statements) so that nine months of operations are
included in fiscal 1996 versus only eight months of operations in fiscal 1997.
The remaining $232 decrease is primarily attributable to the termination of two
pipeline employees in January 1997, decreased insurance costs, decreased
property taxes and decreased compressor maintenance costs.
General and Administrative
General and administrative expenses decreased $29 or 3.9% from the
first three quarters of fiscal 1996 to the first three quarters of fiscal 1997.
The net decrease resulted from offsetting factors. Factors causing a decrease
were the sale of the Texas pipeline on May 30, 1997, resulting in only minor
general and administrative expense thereafter, the termination of management
agreements with subsidiaries of MG in January 1997 and the performance of the
related functions internally without additional cost to the Company and
decreased insurance expense. The primary factor causing an increase was a
severance payment to the former President of the Company's natural gas marketing
subsidiary in January of 1997.
Although the Company still markets natural gas, it no longer owns or
operates its Texas pipeline. Future natural gas marketing general and
administrative expenses are expected to be immaterial.
Transportation
Transportation expense increased from zero for the first nine months of
1996 to $81 for the first nine months of fiscal 1997. All of the transportation
expense for fiscal 1997 was incurred in June 1997 and results from the
amortization of the prepaid transportation asset received from UPIPC in the sale
of the Texas pipeline (see Note 3 to the June 30, 1997 financial statements).
Prior to the sale to UPIPC, the Company owned and operated the Texas pipeline
and intercompany transportation charges were eliminated in consolidation.
Commencing June 1, 1997, the Company must amortize the $3,000 prepaid
transportation asset over the remaining term of the Lone Star Contract, which
expires on May 31, 1999.
-13-
<PAGE>
Exploration and Production
Revenues
Oil and Gas Sales
Oil and gas sales decreased $463 or 7.2% from the first nine
months of fiscal 1996 to the first nine months of fiscal 1997. The decrease
results primarily from the sale of 84% of the Company's proved reserves to UPRC
on May 30, 1997 (see Note 3 to the June 30, 1997 financial statements). In
fiscal 1996 oil and gas sales applicable to such reserves were for nine months
versus only eight months in fiscal 1997. In addition to the sale of the
properties to UPRC, two other offsetting factors are relevant. Oil and gas sales
decreased due to a decrease in production volumes. The decline in production
volumes results from the general maturing of the Company's reserves since the
Company has not made any significant reserve acquisitions or conducted any
drilling for over two years. This decrease was offset by an increase in oil and
gas prices in fiscal 1997. Although gas prices for the third quarter of fiscal
1996 were higher than those from the corresponding quarter in fiscal 1997, for
the first nine months of fiscal 1997 prices were 20% - 25% higher, on average,
than those for the first nine months of fiscal 1996.
As a result of the sale to UPRC the Company's oil and gas
production is expected to decrease by at least 60% - 65%. Although the Company
expects to drill several wells on its remaining oil and gas properties,
production from such wells is not expected to replace the production volumes
sold. The Company continues, however, to seek acquisitions of oil and gas
reserves.
Expenses
General and Administrative
General and administrative expenses increased $391 or 68% from the
first nine months of fiscal 1996 to the first nine months of fiscal 1997. The
net increase resulted from offsetting factors. General and administrative costs
decreased approximately $80 because the Company closed its Tulsa, Oklahoma
production office in February 1996. Such costs, however, increased approximately
$370 due to legal costs related to the Larry Long Litigation, which was filed in
July 1996 (see Note 5 to the financial statements) and $50 due to increases in
employee salaries and benefits. Other factors contributed to the remaining $51
increase.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $351 or 19.4%
from the first nine months of fiscal 1996 to the first nine months of fiscal
1997. The decrease was caused by two factors. As a result of the sale of the
Company's Texas oil and gas properties to UPRC on May 30, 1997 (see Note 3 to
the June 30, 1997 financial statements), there were nine months of depreciation,
depletion and amortization with respect to the properties sold in fiscal 1996
versus only eight months in fiscal 1997. In addition, production and thus
depreciation, depletion and amortization decreased due to declining production
as the Company has not drilled any wells or acquired any significant reserves
for over two years.
-14-
<PAGE>
Other Income (Expense)
- ----------------------
Gain on Sale of Assets
On May 30, 1997, the Company sold its Texas oil and gas properties and
pipeline (see Note 3 to the June 30, 1997 financial statements). The sale
resulted in a $19,667 non-recurring gain.
Interest Income
Interest income increased $147 or 21.1% primarily because of interest
earned in June 1997 on the proceeds from the sale of the Company's Texas oil and
gas properties and pipeline (see Note 3 to the June 30, 1997 financial
statements).
Other Income (Expense)
Other income (expense) decreased $3,334 from $3,261 of other income for
the nine months ended June 30, 1996 to other expense of $73 for the nine months
ended June 30, 1997. Of the $3,261 of other income in 1996, $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.
Interest (Expense)
Interest expense decreased $482 or 31.7% from the first nine months of
fiscal 1996 to the first nine months of fiscal 1997. The net decrease in
interest expense is attributable to offsetting factors. Amortization of debt
issuance costs, which is treated as interest expense for generally accepted
accounting procedures, increased $169 from $174 for the first nine months of
fiscal 1996 to $343 for the first nine months of fiscal 1997. The increase is
attributable to debt issuance costs incurred in connection with the Company's
refinancing of its senior debt. Interest expense, on the other hand, decreased
$651 from $1,346 for the first nine months of fiscal 1996 to $695 for the first
nine months of fiscal 1997 primarily because the average debt outstanding during
fiscal 1997 was less than that outstanding during fiscal 1996. On May 30, 1997,
the Company repaid its debt (see Note 7 to the June 30, 1997 financial
statements). The Company does not anticipate that it will need future debt
financing in the foreseeable future.
Tax Provision
During the periods being compared, the Company had substantial tax
carryforwards. At September 30, 1995 a 100% valuation reserve was recorded to
offset the deferred tax asset resulting from such tax carryforwards and other
book/tax timing differences. The valuation reserve was recorded because of
uncertainties related to the disposition of the Company's refining operations
and other factors. No tax provision was required for the nine months ended June
30, 1996 because, as a result of strategies being pursued that would more likely
than not generate taxable income, management believed the Company would utilize
some of its tax carryforwards during fiscal 1996, resulting in a projected
annual tax rate of zero.
-15-
<PAGE>
At September 30, 1996, the Company reduced its valuation reserve to
$13,944 resulting in a $7,716 net deferred tax asset. The deferred tax asset was
recorded primarily because of anticipated future taxable income related to the
Lone Star Contract. Management had determined that it was more likely than not
that such taxable income would be earned; hence the net deferred tax asset was
recorded.
The Company's tax provision for the nine months ended June 30, 1997
consists of two components:
a. The tax provision on pre-tax accounting income, exclusive of the
$19,667 gain on the sale of assets, aggregates $3,661 and
essentially represents the amortization of the remainning deferred
tax asset recorded at September 30, 1996 at an effective rate of
36% of book earnings. The Company expects to record a similar tax
provision for future earnings through amortization of
the remaining deferred tax asset. If future events change the
Company's estimate concerning the probability of utilizing its tax
assets, appropriate adjustments will be made when such a
conclusion is reached.
b. The tax provision on the $19,667 gain equals the Company's
expected tax liability for the taxable income related to the sale
and aggregates $669. The tax rate used in such calculation was 2%
of related taxable income and consists of Federal alternative
minimum taxes. The Company is not subject to a higher tax rate due
to its tax carryforwards. A tax provision of 36% was not provided
for the gain because a related deferred tax asset had not been
provided since the Company did not anticipate selling the
properties and had previously taken the properties off the market.
Earnings Per Share
- ------------------
Since January 1997, the Company repurchased 2,065,100 of its shares
(1,470,100 at June 30, 1997). Earnings per share assuming such shares had not
been repurchased and assuming no interest were earned on the funds used to
repurchase the shares would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended Quarter Ended
June 30, 1997 June 30, 1997
------------------------ --------------
<S> <C> <C>
Earnings Per Share
Primary $ 3.79 $ 3.01
============= =============
Fully diluted $ 3.78 $ 3.00
============= =============
Weighted Average Shares and
Equivalent Shares Outstanding
Primary 6,724,041 6,760,097
========== ==========
Fully diluted 6,743,076 6,779,132
========== ==========
</TABLE>
The Company currently may repurchase an additional 434,900 shares under
limitations set by its Board of Directors.
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a result of the sale of its oil and gas properties and pipeline and
the repayment of its revolving credit facility the Company had $42,573 in
unrestricted cash and owed no long-term debt as of June 30, 1997. In addition,
the Company retained its gas sales contract with Lone Star and a portion of its
exploration and production business. An estimate of the Company's expected cash
resources and obligations from July 1, 1997 to September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Expected Cash Resources: ("000's" Omitted)
<S> <C>
Cash on hand - July 1, 1997................................................ $ 42,573
Cash flow - gas marketing and remaining exploration and
production operations.................................................. 43,500
Proceeds from Powerine arbitration......................................... 10,700
Proceeds from platinum recovery - IRLP..................................... 900
Proceeds from SWAP litigation - IRLP....................................... 775
Interest................................................................... 11,511
--------
109,959
--------
Expected Cash Obligations:
Liquidation of working capital............................................. 2,054
New drilling............................................................... 1,500
Purchase of $434,900 shares of common stock of the
Company (actually purchased after June 30, 1997)....................... 8,091
Purchase of additional shares of common stock of the
Company................................................................ 5,654
Quarterly dividends (based on outstanding shares at August
11, 1997 less additional purchases of 434,900 shares).................. 5,151
IRLP payment of vendors, principally governmental taxing
authorities supported by tax liens..................................... 1,675
--------
24,125
--------
Excess of Expected Cash Resources Over Expected Cash
Obligations............................................................ $ 85,834
========
</TABLE>
The following apply to the Company's expected cash resources and obligations:
a. Interest income on cash has been computed at 5%. If
unanticipated expenditures are made or interest rates
decrease, interest income will decrease.
b. Although the Company is currently evaluating several
investments in the energy sector, it does not expect to make
any investments at the present time. It may, nevertheless, do
so in the future. The above estimates do not include any
expenditures for such investments.
c. The Company's Board of Directors has authorized the purchase
by the Company of up to 2,500,000 shares of common stock in
the open market. To date, 2,065,100 shares
-17-
<PAGE>
have been repurchased. The Company may or may not repurchase
the remaining 434,900 shares available, depending on market
prices and other factors and such repurchases may be at a
different price than that assumed in the above estimates. The
Company may not be able to increase the share repurchase limit
above 2,500,000 shares because of Federal tax regulations
governing limitations upon the utilization of net operating
losses upon changes in ownership. The Company has substantial
net operating loss and other tax carryforwards.
d. Although the Company's Board of Directors has adopted a
quarterly dividend policy of $.15 per quarter, the Board may
elect to change such policy at any time.
In addition to the foregoing, the above estimates assume that the
Company will not be adversely impacted by any of the following risk factors. If
such events occur, the Company's estimated cash flow will probably be adversely
affected and such affects may be material.
a. Contingent Liabilities - Discontinued Refining Operations
---------------------------------------------------------
1.Contingent Environmental Liabilities:
-------------------------------------
Although the Company has never itself conducted refining
operations and its refining subsidiaries have exited the
refining business and the Company does not anticipate any
further required expenditures related to discontinued
refining operations, interested parties could seek redress
from the Company for environmental liabilities. In the past,
government and other plaintiffs have often named the most
financially capable parties in such cases regardless of the
existence or extent of actual liability. As a result there
exists the possibility that the Company could be named for
any environmental claims related to discontinued refining
operations of its present and former refining subsidiaries.
The Company has recently been informed that the United
States Environmental Protection Agency is investigating
offsite acid sludge waste found near the Indian Refinery and
is also remediating surface contamination in the Indian
Refinery property (now owned by American Western - see
below). Neither the Company nor IRLP has been named with
respect to these actions. Finally, the bankruptcy court
handling American Western's bankruptcy proceedings has
approved American Western's petition to sell the Indian
Refinery in an auction to the highest bidder on August 15,
1997. If there is no bidder or the highest bidder dismantles
and salvages the Indian Refinery rather than operates it,
the remediation of related environmental contamination and
claims against potentially responsible parties may be
accelerated. Although the Company does not believe it has
any liability with respect to environmental matters of its
current and former refining subsidiaries and would contest
any claim, courts might find otherwise and the cost and time
to litigate such claims would be material and adversely
affect the estimated cash flow above. Any resulting
litigation could last several years.
-18-
<PAGE>
2.IRLP Vendor Liabilities:
------------------------
IRLP owes its vendors approximately $6,100. Its only major
asset is a $5,500 note due from the purchaser of the Indian
Refinery, American Western Refining Limited Partnership
("American Western"). IRLP believes that it can fully
discharge its vendor liabilities if it receives the entire
$5,500 due from the American Western note. In November 1996,
American Western filed for bankruptcy and has undertaken to
sell the Indian Refinery while in bankruptcy. To date, it
has not found any qualified and willing buyers and has
received approval of the bankruptcy court to conduct an
auction to sell the Indian Refinery to the highest bidder on
August 15, 1997. Although IRLP holds a first mortgage on the
Indian Refinery, other creditors of American Western and the
party which is funding American Western's bankruptcy
proceeding hold liens superior to that of IRLP. If the
Indian Refinery is sold, it is unlikely that IRLP's share of
the proceeds will be sufficient to settle its vendor
liabilities. If the Indian Refinery is not sold, IRLP will
not be able to settle its vendor liabilities. In either of
these situations, IRLP may file for bankruptcy if it cannot
settle with its vendors since its only significant asset is
its note due from American Western. In addition, the
Illinois Department of Revenue recently filed to assess two
present officers of the Company and two former officers of
the Company for certain tax liabilities of IRLP. The Company
has responded that its officers are not liable for the
taxes. Although the Company does not believe such
developments affect its estimated cash flow, such may not be
the case. IRLP's vendors may attempt to hold the Company
liable for IRLP's debts and/or the Illinois Department of
Revenue may prevail in its efforts to assess officers of the
Company for IRLP liabilities, in which case the Company
would have indemnification obligations to such officers. In
either case the Company's estimated cash flow may be
adversely affected.
3.IOC Bankruptcy
----------------
IOC, another wholly-owned subsidiary of the Company, filed
for bankruptcy in February 1997. IOC's only asset is a
platinum catalyst worth approximately $901 and IOC's primary
creditor is IRLP. Although the Company does not believe
IOC's bankruptcy will affect the Company's estimated cash
flow or operations, such may not be the case.
4.Powerine Arbitration Litigation:
----------------------------------
Although the arbitrator has ruled in the Company's favor in
the Powerine Arbitration (see Note 5 to the financial
statements) and the Company believes that it is entitled to
gross arbitration proceeds of $10,700, MG may be disputing
the computation and amount of the arbitration award and
there can be no assurance that the proceeds expected by the
Company will be received as or when anticipated.
5.Larry Long Litigation:
------------------------
The above cash flow estimate does not assume the Company
will have to pay any claim related to the Larry Long
litigation. Although the sale of the Company's oil and gas
properties has significantly reduced the Company's exposure,
there can be no assurance that the plaintiffs will not file
new lawsuits, having already amended their original claim
three times. In such case, the Company would be exposed to
the continuing costs
-19-
<PAGE>
of defending the amended petitions, and, if it is determined
that settlement is in the Company's best interest, the cost
to settle the lawsuit. No such costs are included in the
above estimate of cash flow.
6.Credit Risk - Lone Star:
--------------------------
At the current time, approximately 88% of the Company's gas
marketing volumes are sold to a single customer, Lone Star,
under a long-term gas sale contract, which terminates on May
31, 1999. Although Lone Star has paid for all gas purchased
when such payments were due, any inability of Lone Star to
continue to pay for gas purchased would adversely affect the
Company's cash flow.
7.Supply Risk - MGNG:
---------------------
The Company now purchases approximately 77% of its gas
supplies for the Lone Star Contract from MGNG. If spot gas
prices increase significantly and MGNG has not hedged its
future commitment to supply gas to the Company or if MGNG
experiences financial problems, MGNG may be unable to meet
its gas supply commitments to the Company. If MGNG does not
fulfill its gas supply commitment to the Company, the
Company may not be able to fulfill its gas delivery
commitment to Lone Star or to achieve the gross margins
currently being earned. This would adversely impact the
Company's cash flow. Under such circumstances the Company
may not be able to recover lost profits and cash flow from
MGNG despite contractual provisions providing for such
recovery.
8.Price Risk - Gas Supply:
--------------------------
The Company has not hedged or fixed the price on
approximately 33% of the gas that it must supply over the
next 23 months under its two gas sales contracts. If gas
prices increase or remain high, the Company may incur
significant losses or reduced gross gas margins when it buys
gas at market prices to provide gas for its two gas sales
contracts, thus reducing its cash flow from that projected.
9.Gas Contract Litigation
-------------------------
The Company's natural gas marketing subsidiaries and MGNG
are parties to several natural gas contracts. The provision
of such contracts are very complex and it is possible that
the Company's subsidiaries and MGNG may litigate several
contractual issues of disagreement. The outcome of such
litigation may impact the above cash flow estimates.
10.Public Market for the Company's Stock
----------------------------------------
Although there presently exists a market for the Company's
stock, such market is volatile and the Company's stock is
thinly traded. In addition, the Company's earnings history
is sporadic. Although the Company believes that its earnings
and cash flow will be more predictable in the future, there
can be no assurance that such will be the case. Such
volatility may adversely affect the market price and
liquidity of the Company's common stock.
-20-
<PAGE>
In addition, the Company, through its stock repurchase
program, has effectively become the major market maker in
the Company's stock. If the Company must cease repurchasing
shares due to tax regulations governing its tax
carryforwards or for other reasons, the market value of the
Company's stock may be adversely affected.
11.Future of the Company:
-------------------------
As noted in Note 3 to the financial statements, the Company
recently sold 84% of its proved oil and gas reserves and its
Texas pipeline. The Company's primary remaining asset is its
gas sales contract with Lone Star, which expires on May 31,
1999. Although the Company is seeking investments in the
energy sector, including oil and gas properties, the current
market is a seller's market and the Company may not be able
to acquire such investments at a reasonable price. If the
Company does not acquire additional assets, its Board of
Directors may decide to liquidate the Company and distribute
its assets after allowing for adequate reserves.
12.Other
--------
In addition to the specific risks noted above, the Company
is subject to general business risks, including insurance
claims in excess of insurance coverage, tax liabilities
resulting from tax audits, drilling risks that new drilling
will result in dry holes or marginal wells and the risks and
costs of litigation.
-21-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding lawsuits, reference is made to Item 3 of the
Company's Form 10-K (Annual Report) for the fiscal year ended September 30,
1996. Also see Note 5 to the June 30, 1997 financial statements included in Part
I.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 3.1 - Restated Certificate of Incorporation (1)
Exhibit 3.2 - Bylaws (2)
Exhibit 4.1 - Specimen Stock Certificate representing
Common Stock (3)
Exhibit 4.2 - Rights Agreement between Castle Energy
Corporation and American Stock Transfer and
Trust Company as Rights
Agent, dated as of April 21, 1994 (2)
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K:
1. May 16, 1997 - Item 5 - Other Events
2. May 30, 1997 - Item 2 - Acquisition or Disposition
of Assets:
Pro-Forma Financial Statements:
Pro-Forma Consolidated Balance
Sheet - March 31, 1997
Pro-Forma Consolidated Statement
of Operations - October 1, 1996 -
March 31, 1997
Pro-Forma Consolidated Statement
of Operations - October 1, 1995 -
September 30, 1996
(1) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1994.
(2) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1994.
(3) Incorporated by reference to the Registrant's Form S-1 (Registration
Statement), dated September 29, 1993
-22-
<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 12, 1997 CASTLE ENERGY CORPORATION
/s/ Richard E. Staedtler
-------------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-23-
<PAGE>
Exhibit 11.1
(1 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
Fully Fully
Primary Diluted Primary Diluted
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
I. Shares Outstanding, June 30 5,439,546 5,439,546 6,693,646 6,693,646
II. Stock Purchased During the Period:
Options exercised (weighted) 42,417 42,417
Purchase of treasury stock (weighted) (47,542) (47,542) -- --
------------ ------------ ----------- ------------
5,434,421 5,434,421 6,693,646 6,693,646
III. Weighted Equivalent Shares:
Assumed options and warrants exercised 33,052 47,884 36,123 36,181
------------ ------------ ----------- ------------
IV. Weighted Average Shares and Equivalent Shares 5,467,473 5,482,305 6,729,769 6,729,827
============ ============ ----------- ------------
V. Net Income $ 20,363,000 $ 20,363,000 $ 1,816,000 $ 1,816,000
============ ============ =========== ============
VI. Net Income Per Share $ 3.72 $ 3.71 $ .27 $ .27
============ ============ =========== ============
</TABLE>
<PAGE>
Exhibit 11.1
(2 of 2)
Castle Energy Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------- ------------------------------
Fully Fully
Primary Diluted Primary Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
I. Shares Outstanding, June 30 6,693,646 6,693,646 6,693,646 6,693,646
II. Stock Purchased During the Period:
Options exercised (weighted) 20,277 20,277
Purchase of treasury stock (weighted) (636,238) (636,238) -- --
------------ ------------ ------------ ------------
6,077,685 6,077,685 6,693,646 6,693,646
III. Weighted Equivalent Shares:
Assumed options and warrants exercised 10,118 29,153 24,233 35,526
------------ ------------ ------------ ------------
IV. Weighted Average Shares and Equivalent Shares 6,087,803 6,106,838 6,717,879 6,729,172
============ ============ ============ ============
V. Net Income $ 25,509,000 $ 25,509,000 $ 12,444,000 $ 12,444,000
============ ============ ============ ============
VI. Net Income Per Share $ 4.19 $ 4.18 $ 1.85 $ 1.85
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997 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-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 42,573
<SECURITIES> 0
<RECEIVABLES> 15,754
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,171
<PP&E> 10,216
<DEPRECIATION> 7,618
<TOTAL-ASSETS> 87,931
<CURRENT-LIABILITIES> 12,414
<BONDS> 0
0
0
<COMMON> 3,396
<OTHER-SE> 72,037
<TOTAL-LIABILITY-AND-EQUITY> 75,433
<SALES> 15,265
<TOTAL-REVENUES> 15,265
<CGS> 8,247
<TOTAL-COSTS> 13,235
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 21,799<F1>
<INCOME-TAX> 1,436
<INCOME-CONTINUING> 20,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,363
<EPS-PRIMARY> 3.72
<EPS-DILUTED> 3.71
<FN>
<F1>Includes 19,667 gain on sale of assets
</FN>
</TABLE>
