SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-11516
BOX ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation or organization)
75-2369148
(I.R.S. employer identification no.)
8201 Preston Road, Suite 600, Dallas, Texas 75225-6211
(Address of principal executive offices) (Zip code)
(214) 890-8000
(Registrant's telephone number, including area code)
Indicate by check mark 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
There were 3,250,110 outstanding shares of Class A (Voting) Common
Stock, $1 par value, on May 13, 1996. There were also 17,553,010
outstanding shares of Class B (Non-Voting) Common Stock, $1 par value, on
such date.
<PAGE>
BOX ENERGY CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 1996
and December 31, 1995 3
Condensed Statements of Income - Three Months
Ended March 31, 1996 and 1995 4
Condensed Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOX ENERGY CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1996 1995
___________ ____________
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 7,855 $ 21,644
Marketable securities -
available for sale 38,284 24,757
Accounts receivable - oil and
natural gas 7,550 8,048
Accounts receivable - other 532 606
Prepaid expenses and other
current assets 3,172 663
___________ ____________
Total current assets 57,393 55,718
___________ ____________
Properties
Oil and natural gas properties
(successful-efforts method) 172,578 165,454
Other properties 3,220 3,096
Accumulated depreciation,
depletion and amortization (97,659) (93,651)
___________ ____________
Total properties 78,139 74,899
___________ ____________
Other assets
Deferred income tax asset
(net of valuation allowance) 11,771 13,027
Deferred charges
(net of accumulated amortization) 1,781 1,847
___________ ____________
Total other assets 13,552 14,874
___________ ____________
Total assets $ 149,084 $ 145,491
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,133 $ 4,829
Accrued interest payable 1,540 391
Accrued transportation payable
- related party 243 289
Net Profits expense payable 2,784 2,858
___________ ____________
Total current liabilities 9,700 8,367
___________ ____________
Convertible subordinated notes payable 55,077 55,077
___________ ____________
Total liabilities 64,777 63,444
___________ ____________
Commitments and contingencies (Note 3)
Stockholders' equity
Common stock, $1.00 par value
Class A (voting) - 15,000,000 shares
authorized; 3,250,110 shares issued
and outstanding 3,250 3,250
Class B (non-voting) - 30,000,000 shares
authorized; 17,553,010 shares issued
and outstanding 17,553 17,553
Additional paid-in capital 25,197 25,197
Retained earnings 38,620 36,204
Valuation allowance for
marketable securities (313) (157)
___________ ____________
Total stockholders' equity 84,307 82,047
Total liabilities and ___________ ____________
stockholders' equity $ 149,084 $ 145,491
=========== ============
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
1996 1995
___________ ____________
Revenues
Oil Sales $ 4,433 $ 2,781
Natural gas sales 13,497 10,217
Other income 1,143 1,516
___________ ____________
Total revenues 19,073 14,514
___________ ____________
Costs and expenses
Operating costs 1,486 1,404
Net Profits expense 4,221 2,814
Exploration expense 2,467 2,699
Depreciation, depletion
and amortization 3,984 2,923
General and administrative expenses 1,917 1,951
Reorganization costs - 723
Interest and financing costs 1,241 1,160
___________ ____________
Total costs and expenses 15,316 13,674
___________ ____________
Income before income taxes 3,757 840
Income tax expense 1,340 101
___________ ____________
Net Income $ 2,417 $ 739
=========== ============
Primary earnings per share $ 0.12 $ 0.04
=========== ============
Weighted average shares of common stock
and common stock equivalents outstanding 20,806 20,803
=========== ============
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
1996 1995
___________ ____________
Cash flow from operations
Cash received from customers for
oil and natural gas sales $ 18,428 $ 12,291
Cash received from other sources 528 333
Cash received from interest income 647 692
Cash paid to suppliers and employees (6,791) (5,364)
Cash paid to Net Profits interest owner (4,295) (3,212)
Cash paid for interest and financing
expense (26) (19)
___________ ____________
Net cash flow from operations 8,491 4,721
___________ ____________
Cash flow from investments
Payments for capital expenditures (8,553) (3,934)
Investment in marketable securities (13,770) -
Proceeds from sale of property 43 635
___________ ____________
Net cash flow used for investments (22,280) (3,299)
Net increase (decrease) in cash and cash
equivalents (13,789) 1,422
Cash and cash equivalents at beginning
of period 21,644 17,496
___________ ____________
Cash and cash equivalents at end of
period $ 7,855 $ 18,918
=========== ============
Reconciliation of net income to
net cash flow from operations:
Net income $ 2,417 $ 739
Depreciation, depletion
and amortization 3,984 2,923
Amortization of deferred charges 66 58
Amortization of premium
on marketable securities 3 4
Dry hole and impaired property costs 1,328 410
(Gain) on sale of assets (43) (610)
Deferred income tax expense 1,340 101
(Increase) decrease in accounts
receivable 572 (591)
(Increase) decrease in prepaid expenses
and other current assets (2,509) 240
Increase in accounts payable 1,407 1,845
(Decrease) in Net Profits expense payable (74) (398)
___________ ____________
Net cash flow from operations $ 8,491 $ 4,721
=========== ============
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
Note 1. Accounting Policies and Basis of Presentation
These financial statements include the accounts of Box Energy
Corporation, a Delaware corporation (the "Company"). Formed in 1991, the
Company was inactive until it acquired all of the assets and liabilities
of OKC Limited Partnership (the "Predecessor Partnership") on April 15,
1992 in exchange for the common stock of the Company, which stock was
distributed to the general partners, limited partners and other
unitholders of the Predecessor Partnership (the "Corporate Conversion").
The Corporate Conversion was accounted for in a manner similar to a
pooling of interests as the unitholders of the Predecessor Partnership
received an equivalent equity interest in the Company. Accordingly, the
assets and liabilities were recorded at historical costs of the
Predecessor Partnership, except for a deferred income tax asset which
resulted from an increase in the federal income tax basis of the Company's
assets as a result of the Corporate Conversion. Certain reclassifications
for prior periods have been made to conform with the current period
presentation.
The financial statements have been prepared in accordance with the
instructions to Form 10-Q and, therefore, may not include all disclosures
required in financial statements prepared in conformity with generally
accepted accounting principles. Financial information provided in this
report reflects all transactions and adjustments which are, in the opinion
of management, necessary for a fair statement of results of operations and
financial position of the Company for the interim periods presented. All
adjustments are of a normal recurring nature. The condensed balance sheet
as of December 31, 1995 was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with
the audited financial statements of the Company for the year ended
December 31, 1995, which were included in the Company's 1995 Annual Report
to Shareholders. The results of operations of the Company for the three
months ended March 31, 1996 are not necessarily indicative of the results
for the full year 1996. No material changes in the significant accounting
policies or details of accounts were made during the interim periods
presented, except for the following changes in Marketable Securities.
Marketable Securities
In addition to the United States Treasury Notes ("Treasury Notes")
held at December 31, 1995, the Company purchased marketable securities
during the first quarter of 1996 which consist of the following: Treasury
Notes totaling $1.0 million; Federal Agency securities totaling $2.5
million and other high grade corporate debt securities totaling $10.3
million. As of March 31, 1996, the marketable securities will mature as
follows, $11.3 million within one year, $26.0 million between one and five
years and $1.0 million between 5 and 10 years.
Note 2. Related Party Transactions
The Amended and Restated Certificate and Articles of Limited
Partnership of the Predecessor Partnership (the "Partnership Agreement")
provided that the Predecessor Partnership could transact business with an
affiliate if such transaction was fair and reasonable to the Predecessor
Partnership and on terms no less favorable to the Predecessor Partnership
than could be obtained from an unrelated party. Similarly, the Board of
Directors of the Company has authorized the Company to enter into a
transaction with an affiliate of the Company so long as the Board of
Directors determines that such a transaction is fair and reasonable to the
Company and is on terms no less favorable to the Company than can be
obtained from an unaffiliated party in an arms' length transaction.
Box Brothers Holding Company, a Delaware corporation, owns
approximately 57% of the Class A (Voting) Common Stock of the Company, as
well as 94% of the outstanding stock of CKB Petroleum, Inc. ("CKB
Petroleum") and CKB & Associates, Inc. ("Associates"). In March 1985, CKB
Petroleum purchased a minority interest in the pipeline transporting oil
from the wells in the Company's South Pass blocks to Venice, Louisiana.
Prior to that date, an unaffiliated party charged the Predecessor
Partnership an oil transportation tariff of $2.75 per barrel for
transporting oil from the South Pass blocks to Venice, Louisiana. Since
that date, CKB Petroleum has charged the Predecessor Partnership, and
then the Company, an oil transportation tariff of $2.75 per barrel for
such transportation services. Such tariff was published and filed with the
Federal Energy Regulatory Commission, which regulates such rates. The rate
has remained uniform since 1982 among all owners of the pipeline from
South Pass Block 89 Field. For the three months ended March 31, 1996 and
1995, the Company incurred oil pipeline transportation charges payable to
CKB Petroleum in the amount of $763,000 and $550,000, respectively. See
Note 3. Contingencies.
The purchase and subsequent ownership of this pipeline interest has
been the subject of litigation in the case of Griffin, et al. v. Box, et
al. (the "Griffin" case). This case was recently reversed on appeal and
remanded for a new trial with respect to certain derivative claims against
the Estate of Cloyce K. Box (the "Estate") and Associates and in favor of
the Company. See Note 3. Contingencies. Cloyce K. Box and Associates
(collectively, the "General Partners") were the general partners of the
Predecessor Partnership during its existence from May 1981 until the
Corporate Conversion in April 1992. Cloyce K. Box passed away in October
1993, and his Estate was substituted for him in the Griffin litigation.
The Partnership Agreement provided that the General Partners were to
be indemnified for litigation expenses in certain situations in which they
were sued in their capacity as general partners of the Predecessor
Partnership. Accordingly, the Predecessor Partnership, and later the
Company, paid the legal expenses and other defense costs of the General
Partners during a large portion of the Griffin litigation. Such payments
were required under the Partnership Agreement as a result of the General
Partners' execution of a written undertaking to repay the Company for any
such litigation expenses advanced on their behalf if it was later
determined that such advancements were not subject to indemnification by
the Company. In March 1994, the Company stopped paying the legal expenses
and other defense costs of the General Partners; however, the General
Partners may in the future seek reimbursement from the Company for its
failure to pay such legal fees and costs.
Even if the Griffin case had been affirmed on appeal by the United
States Fifth Circuit Court of Appeals, it is doubtful that a significant
portion of the judgment, including attorneys fees and costs, would have
been recovered by the Company as a result of its claim in the Probate
Court against the Estate because of the uncertainties surrounding the
value and liquidity of the net assets of the Estate and Associates and the
amount of other claims pending against the Estate.
In March 1995, the Company's current directors, two of its former
directors and several of its current officers were named as defendants in
a lawsuit filed in state district court in Dallas, Texas by the same
plaintiffs as in the Griffin case. In addition, the Company's current
directors have been named as defendants in two class action lawsuits filed
in the Delaware Chancery Court in Wilmington. See Note 3. Contingencies.
In accordance with the By-laws of the Company, the defendants have
executed a written undertaking to repay the Company for any such expenses
advanced on their behalf if it is later found that such costs were not
subject to indemnification by the Company. Although the plaintiffs in the
Griffin litigation have requested that the court prohibit the advancement
of such defense costs, the Company believes it has indemnification
obligations to the defendants as a result of the lawsuits.
Note 3. Contingencies
Griffin Cases
The case of Griffin, et al. v. Box, et al. was filed in November
1987 in the United States District Court for the Northern District of
Texas in Dallas. The plaintiffs are a small group of former unitholders of
the Predecessor Partnership, including J.R. Simplot, a former unitholder
whose units of the Predecessor Partnership have since been converted to
approximately 15% of the Company's Class B (Non-Voting) Common Stock. The
defendants are the General Partners, certain of their affiliates and the
Predecessor Partnership. The Estate was substituted in the place of Cloyce
K. Box in the litigation after his death in October 1993. As a result of
the Corporate Conversion, the Company will receive all benefits, and will
suffer all detriments, if any, of the Predecessor Partnership in the
litigation.
Plaintiffs made two types of claims in this case. First, plaintiffs
sought individual damages for alleged securities law violations and a
declaratory judgment regarding their voting rights. All of the plaintiffs'
claims for individual damages and voting rights were denied by the
district court at trial in October 1992.
Secondly, plaintiffs brought derivative claims on behalf of the
Predecessor Partnership alleging that the General Partners breached the
Partnership Agreement, breached fiduciary duties and violated an implied
covenant of good faith and fair dealing in relation to three transactions.
The derivative defendants' motion that the plaintiffs lacked standing on
the derivative claims was rejected by the district court. The first
transaction was the 1985 purchase of an interest in an oil pipeline by CKB
Petroleum. See Note 2. Related Party Transactions. The second transaction
involved the amount of general and administrative expenses paid by the
Predecessor Partnership prior to the Corporate Conversion. The third
transaction was a loan made by the Predecessor Partnership to an
unaffiliated individual. Plaintiffs alleged actual damages of $20.0
million and punitive damages of $60.0 million. In addition, plaintiffs
alleged that the General Partners engaged in racketeering activities in
relation to the three transactions.
In October 1992, the jury returned a verdict on the derivative
claims finding that the General Partners did not breach the Partnership
Agreement but breached fiduciary duties and an implied covenant of good
faith and fair dealing arising from the Partnership Agreement. The jury
awarded actual damages of approximately $20.0 million and future damages
of approximately $6.2 million in favor of the Predecessor Partnership and
against the General Partners relating to the pipeline transaction. Minor
damages were awarded on the general and administrative expenses issue
while no damages were awarded based on the loan transaction. In addition,
the jury found no violation of the racketeering statutes. Punitive damages
of approximately $2.2 million were awarded against Cloyce K. Box.
In March 1994, the district court entered its initial judgment in
favor of the Company and against the Estate and Associates in the amount
of $20.1 million for past damages and against the Estate in the amount of
$2.2 million for punitive damages. In addition, the judgment imposed a
constructive trust for the benefit of the Company upon the pipeline
interest owned by CKB Petroleum, in lieu of the $6.2 million in future
damages included in the verdict. The judgment also dismissed the
plaintiffs' claims for individual damages and voting rights for their
Class B (Non-Voting) Common Stock.
In October 1994, the district court amended its final judgment to
include prejudgment and post judgment interest. The district court also
stated in its amended judgment that it will issue a further order
regarding the constructive trust and require an accounting on post trial
damages pertaining to the pipeline. In a separate order, the district
court granted the plaintiffs' motion for attorneys' fees and costs without
specifying the amount awarded. The plaintiffs sought $3.5 million in
attorneys' fees and costs.
Following trial, the plaintiffs filed a motion with the district
court challenging the foreclosure transaction in February 1994 in which
Box Brothers Holding Company acquired all of the Class A (Voting) Common
Stock of the Company formerly owned by the Estate. The district court
denied this motion without prejudice on the basis that it has no
jurisdiction to rule on the motion. Following this ruling by the district
court, the plaintiffs filed an adversary proceeding in the bankruptcy case
of Box Brothers Holding Company then pending in Wilmington, Delaware. In
February and March 1995, the bankruptcy court dismissed the adversary
proceeding with prejudice and granted Box Brothers Holding Company's
objection to plaintiffs' proof of claim, respectively, and held that Box
Brothers Holding Company has no liability to the plaintiff group. In April
1995, the plan of reorganization of Box Brothers Holding Company was
approved by the bankruptcy court. The plaintiffs' appeals of the rulings
in the adversary proceeding, the proof of claim and the confirmation
order were denied by the United States District Court in February 1996.
The plaintiffs have now appealed all three rulings to the United States
Court of Appeals for the Third Circuit.
The plaintiffs, the Estate, Associates, and CKB Petroleum all filed
notices of appeal in the Griffin, et. al. v. Box, et. al. case to the
United States Court of Appeals for the Fifth Circuit. Oral arguments
were heard on November 6, 1995. Following oral arguments, the appellate
court took the case under submission. On May 2, 1996 the United States
Court of Appeals for the Fifth Circuit issued its opinion in the Griffin
litigation. The Fifth Circuit (i) reversed the judgment and related
damages against the Estate and Associates, and remanded the case for a new
trial because of the jury's inconsistent answers to the liability issues;
(ii) ruled that the trial court's imposition of the constructive trust was
improper; (iii) affirmed the trial court's dismissal of the plaintiffs'
individual claims for monetary damages; (iv) ruled that one plaintiff,
James Lyle, was an original limited partner and remanded the case for a
new trial to determine the number of voting shares to which he is
entitled; (v) remanded the case for further fact findings to determine
whether two other plaintiffs, Hayden McIlroy and B. R. Griffin, were
original limited partners and the amount, if any, of voting stock to which
they are entitled; (vi) affirmed the trial court's judgment that
plaintiffs J. R. Simplot and David Hawk were not entitled to voting stock;
and (vii) found that the trial court had erred in granting plaintiffs'
attorneys fees. The Company continues to study the Fifth Circuit's
opinion and cannot at this time accurately predict what developments will
occur as a result of the opinion.
For the three months ended March 31, 1996 and 1995, the pipeline
operations on which a constructive trust was imposed by the district court
in the Griffin case earned operating revenues of $763,000 and $550,000,
respectively. Interest income of $27,000 and $12,000 was earned during the
three months ended March 31, 1996 and 1995, respectively. Expenses, not
including income taxes, of $268,000 and $253,000, were incurred for the
three months ended March 31, 1996 and 1995, respectively. None of these
amounts have been included in the Company's income statements for such
periods because the Griffin case was then on appeal. A separate bank
account for the pipeline activity was established immediately after the
initial judgment imposed the constructive trust for the benefit of the
Company. Operating revenues received and expenses paid for the pipeline
interest subsequent to that date have been deposited into, and paid from,
this account. The balance in this account at March 31, 1996 was $3.1
million. Such amount has not been included in the Company's balance sheet
as of that date.
In March 1995, the same plaintiffs as in the Griffin litigation
described above filed an action against the Company, all of its present
directors, two of its former directors, its vice president and chief
financial officer, its senior vice president/operations and its vice
president and controller in the state district court in Dallas, Texas. In
their action, the plaintiffs allege that the defendants breached their
fiduciary duty to the Company in relation to the collection of the trial
court judgment entered in favor of the Company in the Griffin litigation.
The plaintiffs further allege conflicts of interest among the directors,
misappropriation of corporate assets, breaches of good faith and fair
dealing, and wrongful payment of certain attorney's fees in the Griffin
case. These claims are apparently alleged both on behalf of the plaintiffs
as individuals and derivatively on behalf of the Company. The damages
sought exceed $50 million plus $100 million in punitive damages against
each defendant. The action has been abated pending resolution of the
underlying case by the U.S. Fifth Circuit Court of Appeals. The defendants
are expected to defend the action vigorously. The Company anticipates
that it will be required to advance the defense costs of the defendants
during the litigation although the plaintiffs have requested that the
court prohibit the advancement of such defense costs. In addition, the
Company may have indemnification obligations to the defendants as a result
of the lawsuit.
Phillips Petroleum Case
In August 1990, Phillips Petroleum Company ("Phillips") brought an
action against the Predecessor Partnership now pending in state court in
Orleans Parish, Louisiana, claiming that Phillips is entitled, pursuant to
its 33% Net Profits interest in South Pass Block 89, to receive an
overriding royalty interest for months in which monthly net profits were
not achieved. In addition, Phillips claims that the net profits account is
being charged an excessive oil transportation fee. In September 1991, this
lawsuit was amended by Phillips to include a claim that the entire $69.6
million lump sum cash payment received by the Predecessor Partnership in
its 1990 settlement of litigation with Texas Eastern Transmission
Corporation ("Texas Eastern Settlement") should have been credited to the
net profits account. Under this latter claim, Phillips alleges damages in
excess of $21.5 million. The Company previously credited the net profits
account with $5.8 million of the $69.6 million received in the Texas
Eastern Settlement, which is all of the Texas Eastern Settlement proceeds
that the Company believes should be credited to the net profits account.
On the first two claims, Phillips alleges aggregate damages of several
million dollars. Phillips further seeks double damages, interest,
attorneys fees and cancellation of the farmout agreement. The Company is
vigorously defending the litigation on the basis that such amounts are not
payable under the Net Profits interest and that Phillips is not entitled
to any of the damages sought. In March 1993, Phillips filed a motion for
summary judgment on its claim relating to the Texas Eastern Settlement.
That motion was denied by the court in July 1993. Discovery is ongoing by
both parties. An initial trial date setting of September 26, 1996 has been
made by the court.
Devere and Nealon Cases
Two class actions, one styled Melissa Devere v. John F. Arning, Don
D. Box, Thomas D. Box, Kent R. Hance, Sr., John L. Kelsey, Alan C.
Shapiro, Norman W. Smith, Ewell Doak Walker and Box Energy Corporation,
and the other styled Caren M. Nealon and B. Peter Knudson v. John F.
Arning, Don D. Box, Thomas D. Box, Kent R. Hance, Sr., John L. Kelsey,
Alan C. Shapiro, Norman W. Smith, Ewell Doak Walker, Richard S. Whitesell,
Jr. and Box Energy Corporation, were filed in the Chancery Court of
Delaware in Wilmington in April and May 1995, respectively. In both cases
the plaintiffs are shareholders of the Company's Class B (Non-Voting)
Common Stock. The defendants are the Company and its current Board of
Directors. Richard S. Whitesell, Jr., a former director, has been
dismissed from the cases. The actions allege that the Company failed to
make a proper response to offers or overtures previously made to purchase
the Company's stock by J.R. Simplot and Phoenix Canada Oil Co. Ltd. and
has failed to solicit other offers for the sale of the Company. The
Company believes these class actions are without legal merit and will
defend the suits vigorously. The cases have been consolidated. All of the
defendants have filed or joined a motion seeking to dismiss the
consolidated case. Further, the defendants have filed a motion to stay
discovery while the motion to dismiss is pending. The court has yet to set
a briefing schedule for either motion. The Company cannot predict when
these motions will be resolved or the outcome of these cases.
Other Contingencies
The Company is not a party to any material pending legal proceedings
other than that described or referred to above. If the Company is not
successful in the foregoing suits, it is the opinion of the Company that
any adverse judgements, other than certain possible results of the
litigation described above, would not have a material adverse effect on
the Company.
In March 1996, Box Brothers Holding Company, the beneficial owner of
57% of the Company's outstanding Class A (Voting) Common Stock, along with
Don D. Box, Gary D. Box and Douglas D. Box, filed an amended Schedule 13D
with the Securities and Exchange Commission. The amended Schedule 13D set
forth that Box Brothers Holding Company, Don D. Box, Gary D. Box and
Douglas D. Box are "currently exploring ways to maximize value to
stockholders of [Box Energy], including, without limitation, the sale of
[Box Energy] and changes to management of [Box Energy]." Management of
the Company cannot accurately predict the future actions of Box Brothers
Holding Company or the impact of those actions.
In May 1993, the U. S. Department of the Interior's Minerals
Management Service ("MMS") stated a new position that royalties are
payable on gas contract settlement proceeds to resolve take-or-pay, buy-
out, buy-down or pricing disputes involving a federal government oil and
gas lease. The Company has complied with all filing requirements and
disclosed the Texas Eastern Settlement to the MMS. Relying on the holding
by the U.S. Fifth Circuit Court of Appeals in a case styled Diamond
Shamrock Exploration Co. v. Hodel and a prior rule of the MMS, the Company
paid a one-sixth royalty to the MMS on $5.8 million of the $69.6 million
received in the Texas Eastern Settlement, which is all of the royalty that
the Company believes is due on the Texas Eastern Settlement proceeds. It
is uncertain whether the MMS will accept the Company's calculation of
royalty on the Texas Eastern Settlement. The ultimate outcome of these
events or potential claims made by the MMS against the Company, if any,
cannot be determined at this time.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical information, this discussion contains
certain forward-looking statements that involve risks and uncertainties
about the business, long-term strategy, financial condition and future of
the Company. Factors that may affect future results are included in the
discussion below as well as in Part I, Items 1 and 2 of the Company's Form
10-K for the year ended December 31, 1995. Actual results could differ
materially from those forward-looking statements.
Liquidity and Capital Resources
On March 31, 1996, the Company's current assets exceeded its current
liabilities by $47.7 million. Cash, cash equivalents and marketable
securities totaled $46.1 million on that date. The ratio of the Company's
current assets to current liabilities on March 31, 1996 was 6 to 1.
The Company's cash flow from operations for the first three months
of 1996 increased by $3.8 million to $8.5 million, constituting an 80%
increase when compared to $4.7 million for the first three months of 1995.
The increase resulted primarily from increased cash revenues received from
oil and natural gas sales. The increase in cash received from oil and
natural gas sales was primarily a result of higher natural gas production
from Platform "B" and oil and natural gas production from Platform "D",
which began production in May 1995. Platform "B" natural gas sales
increased because of production from Well B-13S, which was recompleted in
September 1995, and production from Well B-11S, which commenced in August
1995. In addition, a five-day gas deliverability test for three Platform
"B" gas wells resulted in increased natural gas sales by the Company
effective October 1, 1995 under its long-term gas sales contract.
The Company's future revenues, net income and cash flow from
operations are dependent upon natural gas produced from U-sand gas wells
in the Platform "B" area because of the high production rate from a
limited number of such wells and the high contract price for natural gas
production from those wells. Unforeseen mechanical or other failures of
these wells or significant reductions in estimated natural gas reserves
can potentially have an immediate and significant impact on the operations
and profitability of the Company. The Company attempts to minimize these
risks by maintaining multiple take points from the Platform "B" U-sand
reservoir and by its on-going effort to diversify its oil and natural gas
production from other areas.
In March 1996, initial production began from two new gas wells
drilled in Main Pass Block 262 at a combined gross rate of 32.7 MMcfgd, or
9.1 MMcfgd net to the Company's working interest. Main Pass Block 262 was
one of the three blocks that the Company acquired at the offshore Gulf of
Mexico lease sale in May 1995 and is part of the Company's diversification
efforts in the Gulf of Mexico. The Company anticipates drilling a third
well in this block during the second quarter of 1996. Natural gas
production from this block is expected to add over $4.0 million to oil and
natural gas revenues this year.
Also in March of this year, Well B-11S, a gravel-packed well in
South Pass Block 89, began producing high levels of sand. As a result, the
well was shut-in and production curtailed, resulting in lower natural gas
sales of almost 2.0 MMcfgd to the Company's net revenue interest. The
Company anticipates making a workover attempt on this well during the
second quarter of this year.
A new five day gas deliverability test was conducted for the three
Platform "B" gas wells in April 1996. The Company's net working interest
deliverability ("Seller's Delivery Capacity") on this test was 10.1
MMcfgd, a 38% decrease from the Company's previous Seller's Delivery
Capacity of 16.2 MMcfgd. The decrease resulted from reduced production
from Well B-11S, coupled with the natural depletion of the reservoir
associated with Well B-13S. The Company's long-term natural gas sales
contract covering production from South Pass Block 89 requires the gas
purchaser to take or pay for 80% of the Seller's Delivery Capacity from
the Company's gas wells, which is now 8.1 MMcfgd, or 6.7 MMcfgd after
payment of royalties. The gas contract does not limit the sales of
casinghead gas from the Company's oil wells in South Pass Block 89.
Significant fluctuations in oil and natural gas prices can have a
material effect on the Company's revenue, net income and cash flow from
operations, although the Company's long-term gas sales contract with fixed
prices escalating each year until July 2002 is thought to provide
stability for pricing related to natural gas production from South Pass
Block 89.
The Company's capital expenditures for the first three months of
1996 increased by 118% to $8.5 million from $3.9 million for the same
three month period in the prior year. Almost one half, or $4.1 million, of
the capital expenditures were incurred in Main Pass Block 262, including
costs for platform fabrication and the drilling and completion of two Main
Pass wells. During the first quarter of 1996, the Company incurred capital
expenditures of $1.9 million for leasehold costs and initial drilling
costs for an exploratory well being drilled in Ship Shoal Block 352. Other
capital expenditures during the first quarter of 1996 included drilling
costs in the amount of $1.6 million for seven onshore wells in Alabama,
Texas and New Mexico, leasehold costs totaling $348,000 for additional
onshore prospects and $408,000 for various capital expenditures on the
Company's South Pass blocks.
In April 1996, the Company participated in the high bid on five out
of seven blocks at the federal offshore oil and gas lease sale for the
central portion of the Gulf of Mexico. The five blocks include a 33%
working interest in Ship Shoal Block 116; a 50% working interest in Ship
Shoal Blocks 309 and 353; a 50% working interest in South Timbalier Block
214 and a 100% working interest in South Timbalier Block 279. Oil and gas
leases for the five blocks, which cover 22,500 gross acres, will be
subject to the approval of the United States Department of Interior's
Minerals Management Service ("MMS"). In the bids submitted, the Company
committed $2.5 million for its net share of leasehold bonus for the five
oil and gas leases. The Company may sell or exchange part of its working
interest in one or more of the above blocks for interests in other
offshore blocks.
The Company's capital investment and exploration budget for 1996 is
$37.0 million, which includes $6.9 million for South Pass area capital
expenditures, $18.2 million for non-South Pass prospects in the Gulf of
Mexico and $11.9 million for onshore acquisition, drilling and
exploration operations. The Company has not yet determined the impact on
its 1996 capital investment and exploration budget if oil and gas leases
on one or more of the five additional offshore Gulf of Mexico blocks are
awarded by the MMS. The Company believes that its capital investment and
exploration budget will be primarily funded from cash flow from operations
throughout the year with additional capital requirements being met by
existing cash and cash equivalents or sales of marketable securities, if
required.
During March 1996, the Company purchased marketable securities in
the amount of $13.8 million. The securities are high-grade fixed income
securities with an "AA" rating, or higher, and maturities of five years or
less.
The Company's $25.0 million line of credit facility will expire in
June 1996, at which time the Company expects to renew the line of credit
on similar terms. The line of credit with a current borrowing base of
$10.0 million is collateralized by the Company's South Pass oil and gas
properties. The Company has issued letters of credit to the MMS totaling
$100,000 against this line of credit in connection with the Company's oil
and gas leases in the Gulf of Mexico.
The Company's liquidity and capital resources could be adversely
affected if the Company were to make a significant acquisition of
properties, by certain possible outcomes of litigation, a material decline
in oil or natural gas prices received by the Company or a material decline
in oil or natural gas production or reserves.
Results of Operations
Net income for the first quarter of 1996 was $2.4 million, or $0.12
per share, constituting a 227% increase when compared to net income of
$739,000, or $0.04 per share, during the first quarter of 1995. This
increase resulted from a 31% increase in total revenues, which in turn was
caused by a increase in Platform "B" natural gas production, oil and
natural gas production from Platform "D" commencing in May 1995 and the
initial production from non-South Pass areas. The increase in total
revenues was partially offset by a 12% increase in total costs and
expenses, which was primarily comprised of increased Net Profits expense
and depreciation, depletion and amortization of oil and natural gas
properties.
Net sales volumes and average sales prices of the Company's oil and
natural gas production (including the proceeds from the sale of liquids
extracted from the natural gas) for the first quarters of 1996 and 1995
were as follows:
Three Months Ended
March 31, Increase
1996 1995 (Decrease)
__________ _________ __________
Net sales volumes:
Oil (Bbls):
Platform "B" 63,000 87,000 (24,000)
Platform "C" 55,000 80,000 (25,000)
Platform "D" 110,000 - 110,000
Other-all onshore 14,000 - 14,000
__________ _________ __________
Total oil sales volumes 242,000 167,000 75,000
========== ========= ==========
Natural gas (Mcf):
Platform "B" 1,001,000 938,000 63,000
Platform "C" 379,000 395,000 (16,000)
Platform "D" 358,000 - 358,000
Main Pass Block 262 62,000 - 62,000
Other-all onshore 10,000 - 10,000
__________ _________ __________
Total natural gas sales volumes 1,810,000 1,333,000 477,000
========== ========= ==========
Average sales prices:
Oil (per Bbl) $18.31 $16.67 $ 1.64
Natural gas (per Mcf) $ 7.45 $ 7.67 ($ .22)
Total oil revenues increased by $1.7 million, or 59%, during the
first quarter of 1996 when compared to the first quarter of the prior
year. Production from new sources, primarily Platform "D", added $2.3
million to oil revenues, and a 10% increase in the average oil price
received added $278,000 to oil revenues. A revenue decrease of $900,000
attributable to the natural depletion of oil reserves on Platforms "B" and
"C" offset these increases in oil revenue.
Natural gas revenues increased by $3.3 million, or 32%, to $13.5
million for the first three months of 1996 compared to the same three-
month period last year. The increase resulted principally from the
following three reasons. First, natural gas revenues increased by $1.2
million as a result of natural gas production from Platform "D" and by
$175,000 from initial non-South Pass natural gas production, primarily
from Main Pass Block 262. Second, natural gas production from Platform
"B" increased by 63,000 Mcf as the result of the initial production from
Well B-11S and from the recompletion of Well B-13S in the third quarter of
1995 and the increased deliverability which resulted from the September
1995 deliverability test. This additional natural gas production increased
natural gas sales by $648,000. Third, natural gas prices from South Pass
Block 89 wells increased 10% in accordance with the Company's long-term
gas sales contract, and natural gas prices for South Pass Block 86 wells
increased 107% for the first quarter of 1996 when compared to the same
period of 1995. The increase in sales prices added $1.3 million to natural
gas revenues. The increases above were offset by a slight decrease in
natural gas production from Platform "C".
Other income decreased by $373,000, or 25%, for the three months
ended March 31, 1996 when compared to the same period in prior year. The
decrease resulted principally from lower gains on the sale of assets,
which was $538,000 higher in 1995 due to the sale of non-core real estate
properties in Louisiana and Mississippi.
Net Profits expense increased $1.4 million, or 50%, during the first
quarter of 1996 compared to the first quarter of 1995 because of the
increased natural gas production from Platform "B" and lower capital
expenditures in South Pass Block 89. Exploration expense decreased
slightly because of a decrease in 3-D seismic purchases during the first
quarter of 1996 compared to the prior year. Depreciation, depletion and
amortization expense increased by $1.1 million, or 36%, for the first
quarter of 1996 when compared to the same period in the prior year. This
increase was due to the commencement of depreciation, depletion and
amortization of Platform "D" and other oil and natural gas properties.
Non-recurring reorganization costs totaling $723,000 were incurred
during the first quarter of 1995 by discontinuing certain administrative
positions in the Dallas office and closing other offices. The costs
included severance payments, rent expense on closed offices, and health
insurance and related benefits for terminated employees. No such costs
were incurred in the first quarter of 1996. Deferred income tax expense
for the first quarter of 1996 increased by $1.2 million, or 1227%, when
compared to the first three months of the prior year, as a result of the
substantial increase in net income before income taxes in the first
quarter of 1996.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by this reference is the discussion of
litigation set forth in Part I, Item 1, Note 3 of this Form 10-Q.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1* Certificate of Incorporation, as amended.
3.2* By-Laws.
4.1* Form of Indenture.
10.1* Amended and Restated Certificate and Articles of Limited
Partnership of OKC Limited Partnership.
10.2* Restatement and Amendment of Gas Purchase Contract Dated
July 15, 1982, as amended October 5, 1982 and December 21,
1982 and December 26, 1984.
10.3* Offshore Operating Agreement (SLAM Group), dated as of
January 1, 1977, as amended.
10.4* Farmout Agreement with Aminoil USA, Inc., effective May 1,
1977, dated May 9, 1977.
10.5* Assignment of Lease, dated May 26, 1977.
10.6* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 89, South Pass Area, South and East Addition, by the
United States of America, as Lessor, dated July 1, 1967, said
lease having been assigned to Box Energy Corporation as of
April 15, 1992.
10.7* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 86, South Pass Area, South and East Addition, by the
United States of America, as Lessor, dated July 1, 1983, said
lease having been assigned to Box Energy Corporation as of
April 15, 1992.
10.8* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 87, South Pass Area, South and East Addition, by the
United States of America, as Lessor, dated September 1, 1985,
said lease having been assigned to Box Energy Corporation as
of April 15, 1992.
10.9* Transportation Agreement with CKB Petroleum, Inc. dated March
1, 1985, as amended on April 19, 1989.
10.10* Agreement of Compromise and Amendment to Farmout Agreement,
dated July 3, 1989.
10.11* Settlement Agreement with Texas Eastern Transmission
Corporation, dated November 14, 1990.
10.12* Guarantee of Panhandle Eastern Corporation, dated November 21,
1990.
10.13* Bill of Sale and Assumption of Obligations from OKC Limited
Partnership, dated April 15, 1992.
10.14* Asset Purchase Agreement, dated April 15, 1992.
10.15* Sales Agreement with Marathon Oil Company, effective April 1,
1992, dated June 2, 1992, with Amendment, effective June 8,
1992.
10.16* Sales Agreement with Marathon Oil Company, effective April 1,
1992, dated June 18, 1992.
10.17* 1992 Incentive Stock Option Plan of Box Energy Corporation.
10.18* 1992 Non-Qualified Stock Option Plan of Box Energy
Corporation.
10.19** Pension Plan of Box Energy Corporation, effective April 16,
1992.
10.20# First Amendment to the Pension Plan of Box Energy Corporation
dated December 16, 1993.
10.21# Platform Sharing Agreement, effective December 10, 1993,
regarding Platform "D" in South Pass Block 87.
10.22## Secured Revolving Credit Loan Agreement by and between Box
Energy Corporation, as borrower, and Comerica Bank-Texas, as
lender, dated May 13, 1994.
10.23## Revolving Credit Note dated May 13, 1994, in the maximum
principal amount of $25.0 million executed by Box Energy
Corporation, payable to Comerica Bank-Texas.
10.24## Act of Mortgage and Security Agreement dated May 13, 1994,
executed by Box Energy Corporation in favor of Comerica Bank-
Texas.
10.25## Second Amendment to the Pension Plan of Box Energy Corporation
dated December 31, 1994.
10.26+ Form of Executive Severance Agreement dated as of December 12,
1995 by and between Box Energy Corporation and key employees.
10.27+ Form of Letter Agreement regarding severance benefits dated as
of December 12, 1995 by and between Box Energy Corporation and
employees not covered by Executive Severance Agreements.
10.28+ First Amendment to Secured Revolving Credit Note Agreement
dated May 13, 1995 by and between Box Energy Corporation and
Comerica Bank-Texas.
10.29+ Renewal and Extension Revolving Credit Note dated May 13,
1995, in the maximum principal amount of $25.0 million
executed by Box Energy Corporation, payable to Comerica Bank-
Texas.
11.1 Statement regarding computation of earnings per share.
27 Financial Data Schedule
(b) The Company did not file a Form 8-K for the quarter ended March
31, 1996.
[FN]
___________
*Incorporated by reference to the Company's Registration Statement
on Form S-2 (file number 33-52156) filed with the Commission and
effective on December 1, 1992.
**Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1992 filed with the
Commission and effective on or about March 30, 1993.
#Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1993 filed with the
Commission and effective on or about March 30, 1994.
##Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1994 filed with the
Commission and effective on or about March 30, 1995.
+Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1995 filed with the
Commission and effective on or about March 30, 1996.
[/FN]
<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.
BOX ENERGY CORPORATION
Date: May 13, 1996 By: (Thomas D. Box)
___________________ _________________________________
Thomas D. Box
President and Chief Executive Officer
Date: May 13, 1996 By: (Jill M. Killam)
___________________ _________________________________
Jill M. Killam
Vice President and
Chief Financial Officer
BOX ENERGY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11.1
(In thousands, except per share amounts)
Three Months Ended
March 31,
1996 1995
__________ ___________
Net income for primary earnings per share $ 2,417 $ 739
Interest expense on 8 1/4%
convertible subordinated notes 1,133 1,120
Income tax effect (assumed to be 35%) (397) (392)
__________ ___________
Net income for fully-diluted
earnings per share $ 3,153 $ 1,467
========== ===========
Primary earnings per share $ 0.12 $ 0.04
========== ===========
Fully-diluted earnings per share $ 0.12 $ 0.06
========== ===========
Calculation of weighted average shares
Class A (Voting) common stock 3,250 3,250
Class B (Non-voting) common stock 17,553 17,553
Stock options considered common stock
equivalents 3 0
__________ ___________
Total shares used for primary
earnings per share 20,806 20,803
Contingent shares from remaining
stock options granted 619 334
Contingent shares from 8 1/4%
convertible subordinated notes 5,007 5,007
__________ ___________
Total shares used for fully-diluted
earnings per share 26,432 26,144
========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BOX
ENERGY CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874992
<NAME> BOX ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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<SECURITIES> 38284
<RECEIVABLES> 8082
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