<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, 1998
--------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended _______________________________________________
Commission file number: 0-10990
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: 2,960,729 shares of
Common Stock, $.50 par value outstanding as of August 7, 1998.
<PAGE>
CASTLE ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1998 (Unaudited)
and September 30, 1997........................................................ 1
Consolidated Statements of Operations - Three Months
Ended June 30, 1998 and 1997 (Unaudited)...................................... 2
Consolidated Statements of Operations - Nine Months
Ended June 30, 1998 and 1997 (Unaudited)...................................... 3
Consolidated Statements of Cash Flows - Nine Months
Ended June 30, 1998 and 1997 (Unaudited)...................................... 4
Consolidated Statements of Stockholders' Equity - Nine
Months Ended June 30, 1998 (Unaudited) and Year Ended
September 30, 1997............................................................ 5
Notes to the Consolidated Financial Statements (Unaudited) ................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited)............................... 9
Part II. Other Information
Item 1. Legal Proceedings............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........................... 18
Item 5. Other Information............................................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................................. 18
Signature ........................................................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 38,383 $36,338
Restricted cash........................................................... 605 497
Accounts receivable....................................................... 6,863 5,868
Prepaid transportation, net............................................... 1,460 1,500
Prepaid gas purchases..................................................... 852
Prepaid expenses and other current assets................................. 354 452
Deferred income taxes..................................................... 3,788 2,239
Note receivable - Penn Octane Corporation................................. 1,000
Note receivable - MG...................................................... 10,000
Estimated realizable value of discontinued net refining assets............. 4,059 4,422
---------- --------
Total current assets.................................................... 57,364 61,316
Property, plant and equipment, net:
Natural gas transmission.................................................. 47
Furniture, fixtures and equipment......................................... 213 180
Oil and gas properties, net (full cost method)................................ 3,901 2,818
Gas contracts, net............................................................ 8,649 15,747
Prepaid transportation, net................................................... 1,162
Deferred income taxes......................................................... 1,494
---------- ---------
Total assets............................................................ $ 70,174 $82,717
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable.......................................................... $ 450 $ 707
Accounts payable.......................................................... 12,060 5,615
Accrued expenses.......................................................... 1,104 1,257
Net refining liabilities retained.......................................... 5,564 7,353
---------- ---------
Total current liabilities............................................... 19,178 14,932
Long-term liabilities......................................................... 13 20
---------- -----------
Total liabilities....................................................... 19,191 14,952
--------- --------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized; 6,803,646
shares issued at June 30, 1998 and 6,798,646 shares issued
at September 30, 1997................................................... 3,402 3,399
Additional paid-in capital................................................ 67,122 67,061
Retained earnings......................................................... 33,014 22,468
--------- --------
103,538 92,928
Treasury stock at cost - 3,789,617 shares at June 30, 1998 and 2,085,100
shares at September 30, 1997 (52,555) (25,163)
------- -------
Total stockholders' equity 50,983 67,765
--------- --------
Total liabilities and stockholders' equity.............................. $ 70,174 $82,717
======== =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-1-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ....................................................... $ 16,766 $ 13,944
Transportation .................................................. 7
----------- -----------
16,766 13,951
----------- -----------
Exploration and production:
Oil and gas sales ............................................... 641 1,227
Well operations ................................................. 57 87
----------- -----------
698 1,314
----------- -----------
17,464 15,265
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ................................................... 9,859 8,247
Transportation .................................................. 343 81
Operating costs ................................................. 16 104
General and administrative ...................................... 75 40
Depreciation and amortization ................................... 2,365 2,590
----------- -----------
12,658 11,062
----------- -----------
Exploration and production:
Oil and gas production .......................................... 162 498
General and administrative ...................................... 377 351
Depreciation, depletion and amortization ........................ 175 563
----------- -----------
714 1,412
----------- -----------
Corporate general and administrative expenses ..................... 567 761
----------- -----------
13,939 13,235
----------- -----------
Operating income ...................................................... 3,525 2,030
----------- -----------
Other income (expense):
Gain on sale of assets ............................................ 19,667
Interest income ................................................... 514 409
Other income (expense) ............................................ (2) (22)
Interest expense .................................................. (285)
----------- -----------
512 19,769
----------- -----------
Net income before provision for income taxes .......................... 4,037 21,799
----------- -----------
Provision for (benefit of) income taxes:
State ........................................................... (79) 49
Federal ........................................................... (2,748) 1,387
----------- -----------
(2,827) 1,436
----------- -----------
Net income ............................................................ $ 6,864 $ 20,363
=========== ===========
Net income per share:
Basic ............................................................. $ 2.06 $ 3.75
=========== ===========
Diluted ........................................................... $ 2.02 $ 3.72
=========== ===========
Dividend declared per share ........................................... $ .15 $ .15
=========== ===========
Weighted average number of common and potential dilutive common shares
outstanding:
Basic .......................................................... 3,332,319 5,434,421
=========== ===========
Diluted ........................................................ 3,404,773 5,467,473
=========== ===========
</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,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Natural gas marketing and transmission:
Gas sales ....................................................... $ 54,914 $ 52,736
Transportation .................................................. 7
----------- -----------
54,914 52,743
----------- -----------
Exploration and production:
Oil and gas sales ............................................... 1,861 6,003
Well operations ................................................. 172 322
----------- -----------
2,033 6,325
----------- -----------
56,947 59,068
----------- -----------
Expenses:
Natural gas marketing and transmission:
Gas purchases ................................................... 34,058 32,322
Transportation .................................................. 1,203 81
Operating costs ................................................. 472
General and administrative ...................................... 113 717
Depreciation and amortization ................................... 7,096 8,274
----------- -----------
42,470 41,866
----------- -----------
Exploration and production:
Oil and gas production .......................................... 510 1,792
General and administrative ...................................... 684 966
Depreciation, depletion and amortization ........................ 502 1,462
----------- -----------
1,696 4,220
----------- -----------
Corporate general and administrative expenses ..................... 2,135 2,543
----------- -----------
46,301 48,629
----------- -----------
Operating income ...................................................... 10,646 10,439
----------- -----------
Other income (expense):
Gain on sale of assets ............................................ 19,667
Interest income ................................................... 1,745 844
Other income (expense) ............................................ 27 (73)
Interest expense .................................................. (1,038)
----------- -----------
1,772 19,400
----------- -----------
Net income before provision for income taxes .......................... 12,418 29,839
----------- -----------
Provision for income taxes:
State ......................................................... 5 129
Federal ....................................................... 185 4,201
----------- -----------
190 4,330
----------- -----------
Net income ............................................................ $ 12,228 $ 25,509
=========== ===========
Net income per share:
Basic ......................................................... $ 3.01 $ 4.20
=========== ===========
Diluted ....................................................... $ 2.98 $ 4.19
=========== ===========
Dividends declared per share .......................................... $ .45 $ .15
=========== ===========
Weighted average number of common and potential dilutive common shares
outstanding:
Basic ......................................................... 4,066,103 6,077,685
=========== ===========
Diluted ....................................................... 4,109,843 6,087,803
=========== ===========
</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,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net cash flow provided by operating activities ........... $ 33,947 $ 70,649
-------- --------
Cash flows from investing activities:
Investment in pipelines ............................... (47) (58)
Investment in oil and gas properties .................. (1,585) (1,000)
Investment in note receivable - Penn Octane Corporation (1,000)
-------- --------
Net cash used in investing activities ..................... (2,632) (1,058)
-------- --------
Cash flows from financing activities:
Proceeds of long-term debt ............................. 13,986
Payment of debt issuance costs ......................... (420)
Repayment of long-term debt ............................ (27,992)
Dividends paid to stockholders ......................... (1,942)
Acquisition of treasury stock .......................... (27,392) (16,773)
Proceeds from exercise of stock options ................ 64 724
-------- --------
Net cash (used in) financing activities ................... (29,270) (30,475)
-------- --------
Net increase in cash and cash equivalents ................. 2,045 39,116
Cash and cash equivalents - beginning of period ........... 36,338 3,457
-------- --------
Cash and cash equivalents - end of period ................. $ 38,383 $ 42,573
======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-4-
<PAGE>
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
("000's" Omitted Except Share Amounts)
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
--------------------- Paid-In Earnings -------------------
Shares Amount Capital (Deficit) Shares Amount Total
------ ------ ----------- ----------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1996 ......... 6,693,646 $ 3,347 $ 66,316 ($ 2,952) $ 66,711
Stock acquired .................... 2,085,100 ($ 25,163) (25,163)
Options exercised ................. 105,000 52 745 797
Dividends ......................... (1,446) (1,446)
Net income ........................ 26,866 26,866
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - September 30, 1997 ...... 6,798,646 3,399 67,061 22,468 2,085,100 (25,163) 67,765
Stock acquired .................... 1,704,517 (27,392) (27,392)
Options exercised ................. 5,000 3 61 64
Dividends declared ................ (1,682) (1,682)
Net income ........................ 12,228 12,228
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - June 30, 1998 (Unaudited) 6,803,646 $ 3,402 $ 67,122 $ 33,014 3,789,617 ($ 52,555) $ 50,983
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-5-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three month and the nine month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998 or for subsequent periods. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements for the fiscal year ended September 30, 1997 and the notes
thereto included in the Company's Annual Report on Form 10-K.
In the opinion of the Company, the unaudited consolidated financial
statements contain all normal recurring adjustments necessary for a fair
statement of the results of operations for the three and nine month periods
ended June 30, 1998 and 1997 and for a fair statement of financial position at
June 30, 1998.
Note 2 - September 30, 1997 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1997
were derived from the Company's audited consolidated financial statements for
the fiscal year ended September 30, 1997, which were included in its Annual
Report on Form 10-K.
Note 3 - Discontinued Operations
From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets. In addition,
Powerine Oil Company ("Powerine"), one of the Company's refining subsidiaries,
merged into a subsidiary of the purchaser and is no longer a subsidiary of the
Company. The Company's other refining subsidiaries own no refining assets and
are in the process of liquidation. As a result, the Company has accounted for
its refining operations as discontinued operations.
Note 4 - Contingencies/Litigation
Powerine Arbitration
In October 1997, the Company recovered $8,700 from the Powerine
Arbitration. The Company believes it is entitled to an additional $2,142 plus
interest and its special legal counsel presented arguments to the arbitrator to
recover this amount. On January 27, 1998, the arbitrator ruled against the
Company. The Company is currently pursuing other measures to recover the $2,142
plus interest
-6-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
it believes it is due. Reference should be made to Item 3 of the Company's
Annual Report on Form 10- K for the year ended September 30, 1997.
SWAP Agreement - MGNG
In January 1998, Indian Refining Limited Partnership ("IRLP"), an
inactive refining subsidiary of the Company, filed suit against MG Refining and
Marketing, Inc. ("MGR&M"), a subsidiary of Metallgesellschaft Corp. ("MG"), to
collect $703 plus interest. In February 1998, MG contended that the $703 is not
owed to IRLP and that it had liquidated MGR&M. Management and general counsel
believe that MG's counterclaims are not supported by the facts or Delaware law.
Discovery related to the lawsuit is beginning. Reference should be made to Item
3 of the Company's Annual Report on Form 10-K for the year ended September 30,
1997.
MGNG Litigation
On May 4, 1998, a subsidiary of the Company filed a lawsuit against MG
Natural Gas Corp. ("MGNG") and MG Gathering Company ("MGG"), two subsidiaries of
MG, in the district court of Harris County, Texas. The Castle subsidiary seeks
to recover gas measurement and transportation expenses charged by the defendants
in breach of a certain gas purchase contract. Improper charges exceed $750
before interest. The MG entities have sought to change the jurisdiction of the
case to Delaware and have denied the charges were improper. Discovery has
commenced.
Note 5 - GAMXX Agreement
On February 27, 1998, the Company entered into an agreement ("GAMXX
Agreement") with Alexander Allen, Inc. ("AA") concerning amounts owed to the
Company by AA and its subsidiary, GAMXX Energy, Inc. ("GAMXX"). The Company had
made loans to GAMXX through 1991 in the aggregate amount of approximately
$8,000. When GAMXX was unable to obtain financing, the Company recorded a one
hundred percent loss provision on its loans to GAMXX while still retaining its
lender's liens against GAMXX.
Pursuant to the terms of the GAMXX Agreement, the Company is to receive
$1,000 cash in settlement for its loans when GAMXX closes on its financing.
GAMXX now expects such closing to occur in August or September of 1998.
The Company has carried its loan to GAMXX at zero the last seven years.
The Company will record the $1,000 proceeds as "other income" if and when it
collects such amount. There can, however, be no assurance that GAMXX will close
on its financing or that the Company will ultimately collect the $1,000 it is
due under the GAMXX Agreement.
-7-
<PAGE>
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(Unaudited)
Note 6 - Accounting Pronouncements
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share," ("FAS
No.128") which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS, and requires dual presentations of basic and
diluted EPS on the face of the income statement. SFAS No. 128 is effective for
fiscal years ending after December 15, 1997, and early adoption is not
permitted. The Company adopted FAS 128 effective October 1, 1997. Earnings per
share for the three and nine month periods ended June 30, 1998 have been stated
in accordance with FAS No. 128 and earnings per share for the three and nine
month periods ended June 30, 1997 have been restated in accordance with FAS No.
128.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness, as
well as the ineffective portion of the gain or loss, is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the
accounting for fair value and cash flow hedges. If the derivative instrument is
not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
The Company expects to adopt SFAS 133 in fiscal 2000. To date all
hedging by the Company has been applicable to the Company's gas marketing
operations. Those operations are expected to end on May 31, 1999 when the
related gas contracts terminate. As a result the Company believes SFAS 133 will
not affect existing operations and cannot make a determination as to whether it
will effect future operations until it engages in such operations.
Note 7 - Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market price of natural gas. Commodity derivatives
utilized as hedges of natural gas are futures contracts. Natural gas basis swaps
are sometimes used to hedge the basis differential between the derivative
financial instrument index price and the natural gas field price. In order to
qualify as a hedge, price movements in the underlying commodity derivative must
be highly correlated with the hedged commodity.
Gains and losses on futures contracts that qualify as a hedge of firmly
committed or anticipated purchases and sales of natural gas are deferred on the
balance sheet and credited or debited to cost of gas purchased and recognized in
operations when the related hedged transaction occurs. Gains or losses on
derivative financial instruments that do not qualify as a hedge are recognized
in income currently. There were no such deferred gains or losses at June 30,
1998 or September 30, 1997.
As a result of hedging transactions, the cost of gas purchased
increased $864 for the nine months ended June 30, 1998 and decreased $580 for
the nine months ended June 30, 1997
Note 8 - Penn Octane Note
See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Note 9 - Subsequent Events
Subsequent to June 30, 1998, the Company repurchased 53,300 shares of
its outstanding common stock for $913.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
As noted previously, the Company had discontinued its refining
operations by September 30, 1995. As a result, management's discussion and
analysis focus primarily on the Company's continuing operations -- natural gas
marketing and exploration and production. All references herein to dollars are
in thousands.
In May 1997, the Company sold approximately 84% of its proved oil and
gas reserves and its Texas pipeline to Union Pacific Resources Company ("UPRC")
and one of its subsidiaries. As a result, the operations related to the assets
sold impacted operations for eight of nine months in fiscal 1997 but had no
impact in fiscal 1998.
The Company desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and has included a
discussion of risk factors related to Management's Discussion and Analysis of
Financial Condition and Results of Operations. The discussion and analysis below
include forward-looking data that are based upon management's estimates,
assumptions and projections. Important factors such as the risk factors listed
below and other factors could cause results to differ materially from those
expected by management.
NATURAL GAS MARKETING
As noted above, the Company sold its Texas oil and gas properties and
pipeline to UPRC in May of 1997 while retaining its gas marketing operations
which consist primarily of a long-term gas sales contract ("Lone Star Gas
Contract") with Lone Star Gas Company ("Lone Star"). The sale had the following
effects on the Company's natural gas marketing operations:
a. The Company now has to purchase gas for the Lone Star Contract that
previously was produced from the Company's Texas oil and gas
properties. As a result, the Company became subject to price risk on
such future gas purchases whereas previously the Company was subject
to reserve production risk - the possibility that the volumes of gas
produced were more or less than those expected. Previously, the
Company's marketing subsidiary purchased a portion of the gas required
for the Lone Star Contract from one of the Company's exploration and
production subsidiaries. The resultant intercompany sales were
eliminated in consolidation. Since the sale to UPRC, the Company's gas
marketing subsidiary has purchased all gas required for the Lone Star
Contract from unrelated parties.
b. Having sold its Texas pipeline, the Company now requires outside
transportation to transport its gas to Lone Star. A subsidiary of
UPRC, the purchaser of the Company's Texas pipeline, agreed to
transport all of the remaining Lone Star gas as part of the related
purchase and sale agreement. The Company has recorded the value of
such prepaid transportation at $3,000, its estimated fair market
value, and is amortizing the prepayment over the term of the Lone Star
Contract based upon deliveries made. Previously, the Company incurred
operating expenses to operate the pipeline and recorded pipeline
depreciation.
-9-
<PAGE>
Gross Margin
A comparison of the gross margins earned by the Company's natural gas
marketing segment is as follows:
<TABLE>
<CAPTION>
Lone Star MGNG Intercompany
Contract Contract Eliminations Consolidated
-------- -------- ------------ ------------
Nine Months Ended June 30, 1998:
<S> <C> <C> <C> <C>
Gas Sales $51,233 $3,681 $54,914
Gas purchases (29,513) (4,545) (34,058)
------- ------ -------
Gross margin (deficit) $21,720 ($ 864) $20,856
======= ======= =======
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
======= ======= ========== =======
</TABLE>
Natural gas sales under the Lone Star Contract decreased $1,258 or 2.4%
from the first nine months of fiscal 1997 to the first nine months of fiscal
1998. Under the 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
delivered to Lone Star annually are essentially fixed (the Lone Star Contract
has a take-or-pay provision), the Lone Star Contract year is from February 1 to
January 31 whereas the Company's fiscal year is from October 1 to September 30.
Furthermore, although the volumes to be taken by Lone Star in a given contract
year are fixed, there is no provision requiring fixed monthly or daily volumes
and deliveries accordingly vary with Lone Star's seasonal and peak demands. Such
variances have been significant. As a result, Lone Star deliveries, although
fixed for a contract year, may be skewed and not proportional for the Company's
fiscal periods.
For the first nine months of fiscal 1998 deliveries and sales to Lone
Star exceeded by approximately 7.3% those which would have resulted if daily
deliveries had been fixed and equal. Since annual deliveries and sales have
historically approximated the annual volumes Lone Star is required to take under
the Lone Star Contract, it is expected that deliveries and sales for the
remainder of fiscal 1998 will average less than those which would have resulted
if daily deliveries were fixed and equal.
Gas purchases for the Lone Star Contract decreased $2,113 or 6.7% from
the first nine months of fiscal 1997 to the first nine months of fiscal 1998.
For the nine months ended June 30, 1997 gas purchases comprised 60.3% of gas
sales versus 57.6% of gas sales for the nine months ended June 30, 1998. From
1997 to 1998 the gross margin increased $855 or 4.1%. During the same periods
the gross margin percentage ((gas sales - gas purchases) as a percentage of gas
sales) increased 2.7% from 39.7% for the nine months ended June 30, 1997 to
42.4% for the nine months ended June 30, 1998. The decrease in gas purchases as
a percentage of gas sales and related increase in the gross margin percentage
resulted primarily from a non-recurring favorable adjustment of gas purchase
costs ($517) in fiscal 1998, the replacement of high price contracts expiring in
April 1997 with market price contracts and lower market prices in fiscal 1998.
The Company acquires approximately 90% of
-10-
<PAGE>
the gas required for the Lone Star Contract pursuant to a fixed price gas sales
contract with MGNG ("MG Contract"). As a result the changes in the periods being
compared relate primarily to factors affecting the 10% of gas supplies that the
Company must acquire on the open market at market prices. As of August 7, 1998,
the Company had hedged all of this requirement and thus the Company is not
subject to gas price risk with respect thereto.
MGNG Contract
One of the Company's natural gas marketing subsidiaries is a party to
the MG Contract. Pursuant to the terms of the contract, the subsidiary is
required to sell to MGNG 7,356 MMBtu's (British thermal units) of natural gas at
a fixed price ratably over the period from June 1, 1996 to May 31, 1999. The
fixed price for the gas sold to MGNG is significantly less than the fixed price
of gas sold to Lone Star. For the nine months ended June 30, 1998, the Company
realized a negative gross margin of $864 versus a negative gross margin of $451
for the nine months ending June 30, 1997. The negative margins resulted because
the spot (market) prices paid by the Company for gas, net of hedging effects
where applicable, exceeded the fixed price received by the Company from MGNG
under the contract. The higher negative gross margins for the nine months ended
June 30, 1998 resulted because the spot prices paid by the Company, net of
hedging effects, were greater in fiscal 1998 than in fiscal 1997. Subsequent to
June 30, 1998, the Company hedged all of its remaining unhedged gas
requirements. As a result of such hedging, the Company expects additional losses
on its gas sales contract with MGNG of approximately $460 through May 31, 1999,
the termination date.
Operating Costs
Operating costs decreased to zero for the nine months ended June 30,
1998 from $472 for the nine months ended June 30, 1997 because the Texas
pipeline was sold to UPRC in May 1997 and as of June 1, 1997 the Company no
longer incurred operating costs to operate the Texas pipeline.
General and Administrative
General and administrative costs decreased $604 from $717 for the nine
months ended June 30, 1997 to $113 for the nine months ended June 30, 1998. Most
general and administrative costs incurred during the nine months ended June 30,
1997 related to the Texas pipeline, which was sold in May 1997. The remaining
administrative costs consist primarily of consulting fees for on-going gas
marketing operations.
Transportation
Transportation expense increased $1,122 from $81 for the nine months
ended June 30, 1997 to $1,203 for the nine months ended June 30, 1998. During
the period October 1, 1996 to May 31, 1997, one of the Company's subsidiaries
owned and operated the Texas pipeline and all transportation revenues were for
intercompany transportation and were accordingly eliminated in consolidation of
the Company's financial statements. On May 31, 1997, the Company sold the Texas
pipeline to a subsidiary of UPRC. In both 1997 and 1998, transportation expense
consisted entirely of the amortization of a $3,000 prepaid transportation asset.
Amortization is based upon and thus proportional to deliveries made to Lone
Star. In fiscal 1997, one month's transportation expense was recorded versus
nine months' expense in fiscal 1998.
-11-
<PAGE>
Depreciation and Amortization
Depreciation and amortization decreased $1,178 or 14.2% from the first
nine months of fiscal 1997 to the first nine months of fiscal 1998. The decrease
is attributable to the sale of the Texas pipeline to UPRC in May 1997. As a
result of the sale, the Company no longer owned or depreciated the Texas
pipeline.
EXPLORATION AND PRODUCTION
As noted above, the Company sold its Texas oil and gas properties to
UPRC in May 1997. The reserves sold represented approximately 84% of the
Company's proved oil and gas reserves and 60%- 65% of the Company's gas
production at the time of sale. Comparison of current oil and gas sales,
production costs, general and administrative costs and depletion, depreciation
and amortization to those in fiscal 1997 is thus not meaningful. Accordingly,
exploration and production operations comparisons and analysis have been limited
to those oil and gas properties which were not sold to UPRC. The related
operating results for such properties are as follows:
Nine Months Ended June 30,
--------------------------
1998 1997
---- ----
Revenues:
Oil and gas sales............................. $1,861 2,373
Well operations............................... 172 236
------- ------
2,033 2,609
------- ------
Expenses:
Oil and gas production........................ 510 380
General and administrative.................... 684 593
Depreciation, depletion and amortization...... 502 521
------- ------
1,696 1,494
------- ------
Operating income................................... $ 337 $1,115
======= ======
Revenues
Oil and Gas Sales
Oil and gas sales decreased $512 or 21.6% from the first nine
months of fiscal 1997 to the first nine months of fiscal 1998. The decrease is
attributable to decreased oil and gas prices and decreased production. Many of
the Company's oil and gas reserves are mature reserves and such decreased
production is expected. Although the Company has participated in drilling
approximately twenty-five new wells and reworks from July 1997 through June 30,
1998, production from such new drilling activities has only recently begun
impacting operations. The Company is currently participating in two drilling
programs and expects to participate in at least five additional, new wells in
fiscal 1998. The Company is also reviewing possible investments in other oil and
gas drilling programs and oil and gas property acquisitions, including several
oil and gas investments overseas. As a result, the Company expects that, if it
is successful in making acquisitions, its oil and gas sales will eventually
increase given stable or increasing oil and gas sales prices but there can be no
assurance that wells expected to be drilled will actually be drilled, that the
Company will be successful in making acquisitions or that oil and gas sales will
increase.
-12-
<PAGE>
Well Operations
Revenue from well operations decreased $64 or 27.1% from the first
nine months of fiscal 1997 to the first nine months of fiscal 1998. The decrease
is attributable to the Company's resignation as operator on certain Appalachian
wells where a non-operator offered to operate the wells at a cost significantly
less than that being incurred by the Company in performing such operations. The
related well operations revenues were not replaced.
Expenses
Oil and Gas Production
Oil and gas production expenses increased $130 or 34.2% from the
first nine months of fiscal 1997 to the first nine months of fiscal 1998. The
increase in oil and gas production expenses results from the general maturing of
the Company's oil and gas properties and the tendency for older, depleting
properties to carry a higher production expense burden than recently drilled
properties. Furthermore, oil and gas production expenses, especially
non-capitalized repairs, do not generally occur evenly throughout the year and
are best compared on an annual rather than on a quarterly basis. The Company
expects that, although oil and gas production expense will increase as a result
of its new drilling activities, such expenses will decline when compared to oil
and gas sales given the lower production costs typically associated with new
production. There can be no assurance, however, that such will be the case.
General and Administrative
General and administrative costs increased $91 or 15.3% from the
first nine months of fiscal 1997 to the first nine months of fiscal 1998. The
net increase was primarily attributable to higher employee costs and bonuses and
increased legal costs. The increase was offset to a minor extent by tax refunds
and vendor settlements in 1998 for which there was no counterpart in fiscal
1997.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased $19 or 3.6% from
the first nine months of fiscal 1997 to the first nine months of fiscal 1998.
The decrease is attributable to decreased production, offset by a slightly
higher depletion rate per unit of production.
OTHER INCOME (EXPENSE)
Interest Income
Interest income increased $901 or 106.8% from the first nine months of
fiscal 1997 to the first nine months of fiscal 1998. The increase is primarily
attributable to an increase in the average balance of unrestricted cash. For the
nine months ended June 30, 1997, $600 of interest income was attributable to a
note receivable from MG related to the Powerine Arbitration and $244 resulted
from the investment of excess cash. For the nine months ended June 30, 1998, $31
was attributable to interest on the MG note, $69 was attributable to interest on
a note from Penn Octane Corporation ("Penn Octane"), a public company involved
in liquid petroleum and compressed natural gas business, and the remaining
$1,645 was attributable to the investment of excess cash. Interest on the MG
note ceased on October 14, 1997.
-13-
<PAGE>
Interest Expense
Interest expense decreased $1,038 from $1,038 for the nine month period
ended June 30, 1997 to zero for the nine months ended June 30, 1998 because the
Company repaid all of its long-term debt in May 1997 with a portion of the
proceeds from the sale of its Texas oil and gas properties and pipeline to UPRC.
OTHER INCOME (EXPENSE)
Penn Octane Note
In October 1997, the Company invested $1,000 in a promissary note of
Penn Octane. The note bears interest at 10% payable quarterly and was due on
June 30, 1998. At June 30, 1998, Penn Octane did not repay the note. In May of
1998, Penn Octane was awarded a judgement against a bank and such judgement is
in excess of the $1,000 owed to the Company by Penn Octane. In July of 1998,
Penn Octane agreed to grant the Company a first security interest on the
proceeds of the judgement in return for an extension of the note until December
31, 1998. The final agreement is currently being negotiated by the parties. Penn
Octane has paid all interest due on the note. Although it appears that the
judgement will be collected before December 31, 1998, the extended due date of
the note, there can be no assurance that the bank will not appeal the judgement
and such appeal will not continue beyond December 31, 1998, that the judgement
will not be reversed upon appeal or that the bank will ultimately pay the
judgement assessed to Penn Octane. If the note is not repaid by its extended due
date, the Company intends to reduce the Penn Octane note to its estimated
realizable value, if any.
TAX PROVISION
The tax provision for the nine month period ended June 30, 1997
essentially represents the amortization of the Company's deferred tax assets at
an effective rate of 36% of pre-tax book income. The tax provision for the nine
months ended June 30, 1998 consists of a tax provision of $3,978 (amortization
of deferred tax asset) and an offsetting tax recovery of $3,788. The Company
evaluated its need for a deferred tax valuation allowance at June 30, 1998 based
upon recent positive evidence confirming the Company's ability to utilize its
tax carryforwards. As a result the deferred tax valuation allowance was reduced
$3,788 in June 1998. The Company expects that its future tax expense for book
purposes will thus be 36% although the Company is only paying taxes at a 2%
rate. The 2% rate results from Federal alternative minimum taxes.
Earnings Per Share
Since November 1996, the Company has reacquired 3,842,917 (3,789,617 at
June 30, 1998) shares of its common stock representing approximately 56.5%
(55.7% at June 30, 1998) of shares outstanding. As a result of these share
acquisitions, earnings per share have increased significantly. If no shares had
been reacquired, earnings per share, assuming no income from the cash used for
share acquisitions, would have been as follows:
-14-
<PAGE>
Nine Months Ended June 30,
--------------------------
1998 1997
---- ----
Basic........................................ $1.80 $3.76
Diluted...................................... $1.79 $3.74
Accounting Pronouncements
See Note 6 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward-looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report, including without limitation in conjunction with the expected cash
receipts and expected cash obligations included below. All forward-looking
statements in this report are expressly qualified in their entirety by the
cautionary statements in this paragraph.
During the nine months ended June 30, 1998, the Company generated
$33,947 from operating activities. Of this amount, $8,700 represented the
collection of a portion of the MG Note. During the same period the Company
invested $1,000 in a note from Penn Octane, $1,585 in oil and gas drilling
activities and $27,392 to reacquire shares of its common stock. In addition, it
paid $1,942 in stockholder dividends. At June 30, 1998, the Company had $38,383
of unrestricted cash, $38,186 of working capital and no long-term debt.
At the present time the probable future cash expenditures of the
Company consist of the following:
a. Investments in Oil and Gas Properties and Energy Sector - the Company
has already entered into a joint venture to drill up to 100 wells in
Appalachia over the next three to four years and has undertaken a
10-13 well drilling program on its undrilled Alabama acreage. Nine
Appalachian wells have been drilled by the joint venture. In addition,
the Company has drilled nine new coalbed methane wells and reworked
another six wells in Alabama. At least eleven new Appalachian wells
are planned by the joint venture over the next year and the Company
plans to drill additional coalbed methane wells in Alabama. In
addition, the Company is also reviewing several possible joint
ventures, reserve acquisitions and drilling ventures, including
several overseas, as well as other investments in the energy sector.
The Company believes that low oil and gas prices will increase the
probability that the Company can conclude a transaction or several
transactions on terms favorable to the Company. There can be no
assurance, however, that oil and gas prices will decrease and remain
low or that a transaction will be closed even if such prices decrease
and remain low. Several competitors have significantly more resources
than the Company and may outbid it in future acquisitions.
b. Repurchase of Company Shares - as of August 7, 1998, the Company had
repurchased 3,842,917 of its shares of common stock at a cost of
$53,468. The Company's Board of Directors has authorized the
repurchase of up to 4,250,000 shares to provide an exit
-15-
<PAGE>
vehicle for investors who want to liquidate their investment in the
Company. As a result, 407,083 shares can be repurchased under the
current authorization of the Board of Directors. The decision whether
to repurchase additional shares will depend upon the market price of
the Company's stock, tax considerations, the number of stockholders
seeking to sell their shares and other factors.
c. Recurring Dividends - the Company's Board of Directors adopted a
policy of paying a $.60 per share annual dividend ($.15 per share
quarterly) in June of 1997. The Company expects to continue to pay
such dividend until the Board of Directors, in its sole discretion,
changes such policy.
An estimate of the Company's expected cash resources and obligations
from July 1, 1998 to September 30, 1999, the fiscal year end during which the
Lone Star Contract expires, is as follows:
<TABLE>
<CAPTION>
Expected Cash Resources: ("000's" Omitted)
<S> <C>
Unrestricted cash on hand - June 30, 1998......................... $38,383
Cash flow - gas marketing and exploration and production
operations.................................................... 24,810
Repayment of Penn Octane Corporation note......................... 1,000
Proceeds from SWAP litigation - IRLP.............................. 703
Proceeds from American Western note............................... 2,919
Interest.......................................................... 3,282
---------
71,097
---------
Expected Cash Obligations:
New drilling...................................................... 2,415
Purchase of 53,300 shares of common stock of the Company
from July 1, 1998 to August 7, 1998........................... 913
Quarterly dividends (based on outstanding shares at August 7,
1998)......................................................... 2,220
Assumed IRLP payment of vendors and funding of
environmental reserves........................................ 3,839
---------
9,387
---------
Excess of Expected Cash Resources Over Expected Cash
Obligations................................................... $61,710
=======
</TABLE>
The foregoing estimates assume that the Company's operations and
expected cash flow will not be affected by any of the risk factors listed below:
a. Contingent environmental liabilities
b. Vendor liabilities of the Company's inactive refining subsidiaries
c. Larry Long Litigation
d. Credit risk - Lone Star
e. Supply risk - MGNG
f. Price risk - gas supply
g. Gas contract litigation - Lone Star, MGNG
h. Public market for Company's stock
-16-
<PAGE>
i. Future of the Company
j. Year 2000 risk - accounting and operations
k. Other risks including general business risks, insurance claims
against the Company in excess of insurance recoveries, tax
liabilities resulting from tax audits, drilling risks and
litigation risk.
In addition, the Company is subject to reserve and price risk on the
oil and gas properties it owns. Reserve risk is the possibility that the
reserves produced will not approximate the reserves the Company has estimated.
Price risk is the possibility that the price the Company receives for its
production will vary from current oil/gas prices. Since the Company has not
hedged its future production, changes in oil and gas prices will affect the
results of its exploration and production operations.
Lone Star has recently informed the Company that it intends to limit
daily deliveries under the Lone Star Contract to precise nominated quantities
rather than a reasonable allowance in excess of such nominated quantities. The
Company and Lone Star are currently negotiating this point. If the Company is
unsuccessful the Company could incur a loss on the sale of gas in excess of
quantities nominated by Lone Star. Although the Company does not anticipate a
material loss, such may not be the case.
UPRC has recently terminated employees responsible for the UPRC
deliveries of the Company's gas to Lone Star. If deliveries to Lone Star are
hindered by related pipeline operations problems, the Company could fail to
deliver amounts of gas nominated by Lone Star and by so doing lose the high
gross margins realized on the sale of such gas.
The Company has assumed that its note extension agreement with Penn
Octane will be entered into and its note due from Penn Octane will be paid on
its extended due date, December 31, 1998. To date, all interest on the note has
been paid but the due date of the note was extended when Penn Octane failed to
pay it on its original due date, June 30, 1998. Although the Company expects to
receive a security interest in the proceeds of a judgement due to Penn Octane
from a bank in return for extending the due date of the Penn Octane note, there
can be no assurance that Penn Octane will ultimately collect the judgement and
repay the note to the Company.
The Company has recently completed a study of the Year 2000 issue and
related risks. As a result of the study, the Company has decided to switch its
oil and gas and general ledger accounting software to a vendor which is Year
2000 compliant. The Company expects the cost to approximate $100. The Company
expects to begin using the new software in the first quarter of fiscal 1999. The
Company has also made inquiries to outside parties who process transactions of
the Company, e.g., payroll, commercial banks, transfer agent, reserve engineers,
etc. While some outside parties have confirmed they are Year 2000 compliant,
others have not done so to the Company's satisfaction. The Company is continuing
to pursue the vendors whose responses appear to provide insufficient assurance.
Readers should refer to the Management's Discussion and Analysis of
Financial Condition and Results of Operations Section of the Company's Form 10-K
for the fiscal year ended September 30, 1997 for a detailed description of the
aforementioned risk factors.
If any or several of these risks materialize, the Company's estimated
cash flow and results of operations will probably be adversely impacted and the
impact may be material. The estimated cash flow above assumes none of these
risks materializes. Given the number and variety of risks and the litigiousness
of today's corporate world, it is reasonably possible that one or more of these
risks may occur.
-17-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding lawsuits, reference is made to Item 3 of the
Company's Form 10-K (Annual Report) for the fiscal year ended September 30,
1997. Also see Note 4 to the June 30, 1998 financial statements included in Part
I.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 18, 1998. Proxies
were solicited pursuant to the Notice of Annual Meeting of Stockholders, dated
April 20, 1998 and the accompanying Proxy Statement. A total of 3,546,029 shares
were eligible to vote of which 3,339,046 were present in person or by proxy.
Messrs. Joseph L. Castle II and Sidney F. Wentz were elected to serve as
directors until the 2001 Annual Meeting. The number of votes with respect to Mr.
Castle was 3,337,738 votes for his election and 2,413 votes withheld. The number
of votes with respect to Mr. Wentz was 3,337,266 votes for his election and
2,285 votes withheld.
At the Annual Meeting, the stockholders also approved the appointment of
KPMG Peat Marwick LLP as the Company's independent accountants for the fiscal
year ending September 30, 1998 by a vote of 3,339,036 votes for such
appointment, 1,158 against and 357 abstentions.
In addition to the above, John P. Keller, Martin R. Hoffmann and
Richard E. Staedtler continued on the Board of Directors.
Item 5. Other Information
The persons named as proxies on the form of proxy used to be mailed in
connection with the solicitation of proxies on behalf of the Company's Board of
Directors in connection with the Company's 1999 Annual Meeting of Stockholders
will be authorized to vote in their own discretion on any proposal as to which
the Company shall not have received written notice by March 15, 1999.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
-18-
<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 13, 1998 CASTLE ENERGY CORPORATION
---------------
/s/Richard E. Staedtler
-----------------------
Richard E. Staedtler
Chief Financial Officer
Chief Accounting Officer
-19-
<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,
---------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
I. Shares Outstanding, June 30 3,546,029 3,546,029 5,439,546 5,439,546
II. Stock Purchased During the Period:
Options exercised (weighted) 2,940 2,940 42,417 42,417
Purchase of treasury stock (weighted) (216,650) (216,650) (47,542) (47,542)
------------ ------------ ------------ ------------
3,332,319 3,332,319 5,434,421 5,434,421
III. Weighted Equivalent Shares:
Assumed options exercised 72,454 33,052
------------ ------------ ------------ ------------
IV. Weighted Average Shares and Equivalent Shares 3,332,319 3,404,773 5,434,421 5,467,473
============ ============ ============ ============
V. Net Income $ 6,864,000 $ 6,864,000 $ 20,363,000 $ 20,363,000
============ ============ ============ ============
VI. Net Income Per Share $ 2.06 $ 2.02 $ 3.75 $ 3.72
============ ============ ============ ============
</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,
---------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
I. Shares Outstanding, June 30 4,713,546 4,713,546 6,693,646 6,693,646
II. Stock Purchased During the Period:
Options exercised (weighted) 2,728 2,728 20,277 20,277
Purchase of treasury stock (weighted) (650,171) (650,171) (636,238) (636,238)
------------ ------------ ------------ ------------
4,066,103 4,066,103 6,077,685 6,077,685
III. Weighted Equivalent Shares:
Assumed options exercised 43,740 10,118
------------ ------------ ------------ ------------
IV. Weighted Average Shares and Equivalent Shares 4,066,103 4,109,843 6,077,685 6,087,803
============ ============ ============ ============
V. Net Income $ 12,228,000 $ 12,228,000 $ 25,509,000 $ 25,509,000
============ ============ ============ ============
VI. Net Income Per Share $ 3.01 $ 2.98 $ 4.20 $ 4.19
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1998
INCLUDED IN PART I FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1998
<CASH> 38,383
<SECURITIES> 0
<RECEIVABLES> 6,863
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,364
<PP&E> 12,237
<DEPRECIATION> 8,076
<TOTAL-ASSETS> 70,174
<CURRENT-LIABILITIES> 19,178
<BONDS> 0
0
0
<COMMON> 3,402
<OTHER-SE> 47,581
<TOTAL-LIABILITY-AND-EQUITY> 70,174
<SALES> 56,947
<TOTAL-REVENUES> 56,947
<CGS> 34,058
<TOTAL-COSTS> 46,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,418
<INCOME-TAX> 190
<INCOME-CONTINUING> 12,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,228
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 2.98
</TABLE>