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, 1997
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 75-2369148
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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 12, 1997. There were also 17,455,610
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, 1997
and December 31, 1996 3
Condensed Statements of Income - Three Months Ended
March 31, 1997 and 1996 4
Condensed Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996 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 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOX ENERGY CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 9,640 $ 2,997
Marketable securities - available for
sale 31,220 32,678
Accounts receivable - oil and natural
gas 6,189 7,093
Accounts receivable - other 948 1,456
Prepaid expenses and other current
assets 2,567 1,961
------------ ------------
Total current assets 50,564 46,185
Properties
Oil and natural gas properties
(successful-efforts method) 191,369 187,251
Other properties 3,232 3,226
Accumulated depreciation,
depletion and amortization (121,592) (116,371)
------------ ------------
Total properties 73,009 74,106
Other assets
Deferred income taxes
(net of valuation allowance) 13,826 14,723
Deferred charges
(net of accumulated amortization) 1,520 1,585
------------ ------------
Total other assets 15,346 16,308
------------ ------------
Total assets $ 138,919 $ 136,599
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,347 $ 5,043
Accrued interest payable 1,527 379
Accrued transportation payable -
related party 256 263
Net Profits expense payable 1,691 1,481
------------ ------------
Total current liabilities 7,821 7,166
Convertible subordinated notes payable 55,077 55,077
------------ ------------
Total liabilities 62,898 62,243
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 30,349 28,542
Valuation allowance for marketable
securities (328) (186)
------------ ------------
Total stockholders' equity 76,021 74,356
------------ ------------
Total liabilities and stockholders'
equity $ 138,919 $ 136,599
============ ============
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,
1997 1996
---------- ----------
Revenues
Oil sales $ 5,263 $ 4,433
Natural gas sales 10,771 13,497
Other income 1,193 1,143
---------- ----------
Total revenues 17,227 19,073
Costs and expenses
Operating costs 1,428 1,486
Net Profits expense 2,469 4,221
Exploration expense 1,398 2,467
Depreciation, depletion and
amortization 5,225 3,984
General and administrative expenses 2,499 1,917
Reorganization costs 203 -
Interest and financing costs 1,225 1,241
---------- ----------
Total costs and expenses 14,447 15,316
---------- ----------
Income before income taxes 2,780 3,757
Income tax expense 973 1,340
---------- ----------
Net income $ 1,807 $ 2,417
========== ==========
Income per share $ 0.09 $ 0.12
========== ==========
Weighted average shares of common stock
and common stock equivalents
outstanding 20,803 20,806
========== ==========
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31,
1997 1996
---------- ----------
Cash flow provided by operations
Net income (loss) $ 1,807 $ 2,417
Depreciation, depletion, and
amortization 5,225 3,984
Amortization of deferred charges 65 66
Amortization of premium on marketable
securities 44 3
Dry hole and impaired property costs 639 1,328
(Gain) loss on sale of assets 2 (43)
Deferred income tax expense 973 1,340
Decrease in accounts receivable 1,412 572
(Increase) in prepaid expenses and
other current assets (606) (2,509)
Increase in accounts payable and
accrued expenses 445 1,407
Increase (decrease) in Net Profits
expense payable 210 (74)
---------- ----------
Net cash flow provided by operations 10,216 8,491
---------- ----------
Cash flow from investing activities
Payments for capital expenditures (4,767) (8,553)
Sales and maturities of marketable
securities 1,790 -
Investment in marketable securities (597) (13,770)
Proceeds from sale of property 1 43
---------- ----------
Net cash used in investing activities (3,573) (22,280)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 6,643 (13,789)
Cash and cash equivalents at beginning
of period 2,997 21,644
---------- ----------
Cash and cash equivalents at end of period $ 9,640 $ 7,855
========== ==========
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
Note 1. Accounting Policies and Basis of Presentation
Box Energy Corporation (the "Company") was 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 (the "Corporate
Conversion"). The stock was then distributed to the general partners,
limited partners and other unitholders of the Predecessor Partnership.
The Company accounted for the exchange in a manner similar to a pooling
of interests and recorded the assets and liabilities at the historical
cost of the Predecessor Partnership. References to the Company include
the Predecessor Partnership unless otherwise stated.
The financial statements have been prepared according to 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
management believes are necessary for a fair statement of the Company's
results of operations and financial position for the interim periods
presented. All adjustments are of a normal recurring nature. The
condensed balance sheet as of December 31, 1996 was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. These financial statements
should be read together with the audited financial statements of the
Company for the year ended December 31, 1996, which are included in the
Company's Form 10-K for the period then ended. The results of operations
of the Company for the three months ended March 31, 1997 are not
necessarily indicative of the results for the full year 1997. No
material changes in the significant accounting policies or details of
accounts were made during the interim periods presented.
Note 2. Notes Payable
In December 1992, the Company issued 8 1/4% Convertible
Subordinated Notes ("Notes") in the amount of $55.1 million which mature
on December 1, 2002. The Notes are convertible at the election of the
holders any time before maturity, unless previously redeemed, into
shares of Class B (Non-Voting) Common Stock ("Class B Stock"). Interest
accrued at 8 1/4% per annum is payable semiannually on each June 1 and
December 1. The Company may redeem the Notes in whole or in part any
time after December 1, 1995 at 105.775% of the face amount. This
percentage decreases .825% every year after that. The Notes are
unsecured and subordinate in right of payment to all existing and future
senior indebtedness.
If a "change in control" as defined in the Indenture for the Notes
(the "Indenture") occurs, the Company is required to make an offer
subject to certain restrictions, to purchase all or part of the Notes at
100% of the principal amount, plus accrued interest. Box Brothers
Holding Company, a Delaware corporation, ("BBHC") owns approximately 57%
of the outstanding Class A (Voting) Common Stock of the Company ("Class
A Stock"). Until April 29, 1997, the Class A Stock owned by BBHC was
pledged, with other collateral, by BBHC as security under a credit
agreement with a bank and under a settlement agreement with another
creditor. A default by BBHC under either agreement could have resulted
in a change in control of the Company. On April 29, 1997, BBHC paid all
amounts owed to such creditors with the proceeds of a loan from the
Company and the Class A Stock was pledged to the Company. See Note 3.
Related Party Transactions. The sale of such stock to any party other
than, or not controlled by, at least one of the four Box brothers (i.e.,
Don D. Box, Thomas D. Box, Gary D. Box or Douglas D. Box) or BBHC would
constitute a change in control. In addition, if a receiver of BBHC is
appointed in the Thomas D. Box Lawsuit or otherwise, a change in control
could be deemed to have occurred. See Note 3. Contingencies - Thomas Box
Lawsuit. The Indenture also defines a "change in control" to have
occurred if at any time the existing Board of Directors does not have at
least three independent directors, as defined in the Indenture.
Note 3. Related Party Transactions
A resolution adopted in 1992 by the Board of Directors authorizes
the Company to enter into transactions with affiliates if the Board of
Directors decides that the transactions are fair and reasonable to the
Company and are on terms no less favorable to the Company than can be
obtained from an unaffiliated party in an arms' length transaction.
BBHC owns approximately 57% of the Class A Stock of the Company, and 94%
of the outstanding stock of CKB Petroleum, Inc. ("CKBP") and CKB &
Associates, Inc. ("Associates").
CKBP owns a minority interest in the pipeline transporting oil from
the Company's South Pass blocks to Venice, Louisiana. CKBP charges the
Company an oil transportation tariff of $2.75 per barrel for
transportation services. The 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,
1997 and 1996, the Company incurred oil pipeline transportation charges
payable to CKBP in the amount of $781,000 and $763,000, respectively.
The purchase and ownership of this pipeline by CKBP has been the subject
of litigation in the Griffin, et al. v. Box, et al litigation (the
"Griffin Case"). See Note 4. Contingencies.
The Company bills CKBP and other related parties for an allocated
portion of office space subleased to CKBP, payroll including the related
costs and benefits, and other overhead costs. Expenses totaling $21,000
and $12,000 for the three months ending March 31, 1997 and 1996,
respectively were billed by the Company.
In the past, several current and former Directors and Officers
have been named defendants in various lawsuits. See Note 4.
Contingencies. According to the By-Laws of the Company, the defendants'
legal costs must be paid by the Company. The defendants in these matters
must execute written undertakings to repay the Company for any related
expenses advanced for them if it is later found that such costs were not
subject to indemnification by the Company. Legal costs and expenses,
which include the Thomas D. Box lawsuit and the Devere and Nealon
lawsuit during the three months ended March 31, 1997 and the Devere and
Nealon lawsuit during the three months ended March 31, 1996, advanced,
paid or accrued for these current and former directors totaled $75,000
and $17,000 for the three month periods ended March 31, 1997 and 1996,
respectively.
The trial court in the Griffin, et al. v. Box, et al litigation
entered its amended final judgment in October 1994 with respect to
certain related party transactions on derivative claims against Cloyce
K. Box and Associates (the "General Partners" of the Predecessor
Partnership) and in favor of the Company. After his death in October
1993, the Estate of Cloyce K. Box (the "Estate") was substituted in the
place of Cloyce K. Box in the litigation. The Amended and Restated
Certificate and Articles of Limited Partnership of the Predecessor
Partnership (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 Case litigation. These payments were required under the
Partnership Agreement because the General Partners executed written
undertakings to repay the Company for litigation expenses advanced for
them if it was later decided that such advancements were not subject to
indemnification by the Company. The Company did not pay the legal
expenses and other defense costs of the General Partners after February
1994. After the decision of the Fifth Circuit was handed down, See Note
4. Contingencies - Griffin Case, the General Partners sought and
received in the third quarter of 1996, reimbursement of legal fees for
the period March 1994 to April 1996 totaling $1.4 million. During the
three-month period ended March 31, 1997 the Company reimbursed or
accrued for reimbursement $40,000 for legal expenses related to this
matter.
On April 29, 1997, the Company lent BBHC an aggregate of $7.25
million. The loan is payable on or before May 29, 1997, bears interest
at a rate per annum equal to the prime rate of Texas Commerce Bank, plus
1.00%, and is collateralized by a pledge of the shares of Class A Stock
and the stock of CKBP and Associates owned by BBHC. The loan and its
terms were approved by all of the Company's directors who are not
affiliated or associated with BBHC. Proceeds of the loan were used by
BBHC to retire existing indebtedness secured by the pledge of Class A
Stock owned by BBHC. Under one of the pledge agreements securing the
retired indebtedness, the institution of proceedings for the appointment
of a receiver for BBHC gave the holder of the indebtedness the right to
accelerate the indebtedness and foreclose on the collateral, which could
have resulted in a "change of control" under the Indenture for the
Company's 8 1/4% Convertible Subordinated Notes. See Note 2. Notes
Payable. A change of control would require the Company to tender for the
outstanding Notes at 100% of the principal amount, plus accrued
interest. Since an action is pending to appoint a receiver for BBHC, the
Board considered it advisable and appropriate to facilitate a
refinancing of BBHC's indebtedness. See Note 4. Contingencies - Thomas
D. Box Lawsuit. If a receiver is appointed in the action, a "change of
control" could be deemed to have occurred. Provided that a disinterested
majority of the Company's Board of Directors is satisfied that the loan
is on terms fair to the Company and that BBHC can service the loan, the
Company expects to convert the loan at maturity into a one-year term
loan with the same interest rate and collateral. Because the market
value of the collateral is more than 200% of the loan amount, the
Company believes that it will collect the loan in full, with all accrued
interest.
Note 4. Contingencies
Griffin Case
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 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. Because
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.
Second, 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 3. 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 CKBP, 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 Stock.
In its amended final judgment issued in October 1994, the district
court added pre-judgment and post-judgment interest. 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.
The plaintiffs, the Estate, Associates and Petroleum all filed
notices of appeal in the Griffin case to the Fifth Circuit. In its
opinion in the Griffin case issued May 2, 1996, 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
decide the number of voting shares to which he is entitled; (v) remanded
the case for further fact findings to decide 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. On October 7, 1996, the plaintiffs' application to the United
States Supreme Court for appellate review of the Fifth Circuit's
decision was denied.
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. The trial commenced with the presentation of
evidence which concluded on April 16, 1997. The court has instructed the
parties to file post trial briefs, after which the case will be argued
and the court will make its decision which is expected in June of 1997.
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
Stock. The defendants are the Company and several former members of the
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 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.
Thomas D. Box Lawsuit
On August 16, 1996, Thomas D. Box filed a lawsuit for direct and
derivative relief in the District Court for Dallas County, Texas (Tom
Box v. Gary Box, Don Box, Doug Box, Box Brothers Holding Company, Inc.
and CKB Petroleum, Inc., No 96-08451) alleging that the defendants have
breached fiduciary duties to BBHC and its subsidiary Petroleum, and
wasted or converted their assets, and asking the court for an
accounting, unspecified damages, costs and attorneys' fees and for the
appointment of a receiver for BBHC and CKBP. On or about September 20,
1996, a first amended petition was filed in this lawsuit adding the
Company as a defendant. On or about February 18, 1997, plaintiff filed a
second amended petition adding as defendants, Alan C. Shapiro, Thomas W.
Rollins, Richard D. Squires, and Bernay C. Box. The Board of Directors
appointed a special litigation committee consisting of independent
directors to investigate plaintiff's derivative claims. The special
litigation committee has engaged counsel to assist the committee with
its investigation. The special litigation committee concluded that the
claims are without merit, and that it is in the Company's best interest
not to pursue the derivative action. The Company filed a motion for
summary judgment seeking dismissal of the derivative action, and is
awaiting the court's decision.
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 judgments, other than certain possible
results of the litigation described above, would not have a material
adverse effect on the Company.
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
The following discussion is intended to assist in the understanding
of the Company's financial position and results of operations. The
information below is intended to be read with the financial statements,
the related notes to financial statements and the Company's Form 10-K
for the year ended December 31, 1996. This discussion contains
historical information and certain forward-looking statements that
involve risks and uncertainties about the business, long-term strategy,
financial condition and future of the Company. Statements concerning
results of future exploration, exploitation, development and acquisition
expenditures, and expense and reserve levels are forward-looking
statements. These statements are based on assumptions concerning
commodity prices, drilling results and production, administrative and
interest costs that management believes are reasonable based on
currently available information of known facts and trends; however,
management's assumptions and the Company's future performance are both
subject to a wide range of business risks and there is no assurance that
these goals and projections can or will be met. Further information is
available in the Company's filings with the Securities and Exchange
Commission, which are incorporated by this reference as though fully set
forth herein.
Liquidity and Capital Resources
Box Energy Corporation is an independent oil and gas exploration
and production company with activity and properties located in four core
areas: offshore Gulf of Mexico, Mississippi/Alabama, West Texas/New
Mexico and South Texas. The Company's long-term strategy since 1992 has
consisted of two key components -- maximize the exploration, development
and production of South Pass Block 89 natural gas reserves before the
end of the gas sales contract in July 2002 and replace the value of the
proved natural gas reserves from this block with additional reserves in
the South Pass area and the other core areas. Recently the Company
modified this strategy to focus on stopping the decline in oil and
natural gas reserves in 1997 and then increasing reserves by sustaining
an acceptable annual reserve growth rate. The Company will shift
capital expenditures plans from an intensive exploration program to a
more balanced exploration, development, and acquisition program.
On March 31, 1997, the Company's current assets exceeded its
current liabilities by $42.7 million. Cash, cash equivalents and
marketable securities totaled $40.9 million on that date. The ratio of
the Company's current assets to current liabilities on March 31, 1997
was approximately 6 to 1. Cash flow provided by operations for the first
three months of 1997 increased by $1.7 million to $10.2 million,
constituting a 20% increase when compared to $8.5 million for the first
three months of 1996.
Proved oil and natural gas reserves from South Pass Block 89
Platform B at December 31, 1996, was approximately 20% of the Company's
total proved oil and natural gas reserves. Natural gas production from
this block is sold according to a long-term gas sales contract that
expires in July 2002. The current contract price received is
substantially more than the market price and increases 10% each year.
Because of the long-term contract and the quantity of proved natural gas
reserves from Platform B, the expected future oil and natural gas
revenue less operating costs, Net Profits expense and projected capital
costs which is then discounted annually at 10% ("Discounted Future Net
Revenue"), from this platform is between 30% and 38% of the total
Discounted Future Net Revenue of the Company depending upon future
projected oil prices and projected non-contract natural gas prices.
Approximately 91% of the proved natural gas reserves and approximately
94% of the Discounted Future Net Revenue from Platform B are located in
the U-1/1 reservoir of which 54% is classified as proved developed
producing and is associated with Well B-20S and the remaining 46% is
classified as proved undeveloped.
The long-term gas sales contract provides that the purchaser must
take or pay for 80% of the Company's natural gas produced from wells
classified as gas wells as determined by periodic five-day production
tests and 100% of the natural gas produced from wells classified as oil
wells. The Company's net working interest deliverability ("Seller's
Delivery Capacity") after a five-day deliverability test in September
1995 was 16.2 MMcfgd from Wells B-20S, B-11S and B-13SA. The latest
Seller's Delivery Capacity after a five-day production test in April 1997
was 6.3 MMcfgd from Wells B-20S, B-13SA and B-07S. For this test Well
B-20S was the only well remaining in the U-1/1 reservoir and accounted
for 6.1 MMcfgd.
In an attempt to produce the proved undeveloped natural gas
reserves in the U-1/1 reservoir, the Company began a side track of Well
B-12S into the U-1/1 reservoir during the fourth quarter of 1996, but
the well encountered mechanical problems and the drilling activity was
ceased pending further investigation of the available well bore. Also
during the first quarter of 1997, the Company observed an increase in
the oil production from Well B-20S that may, among other things,
indicate that the oil column is moving into the perforations of this
well. The Company and its partners will continue their efforts to
maximize production from the U-1/1 reservoir in an economical manner
during 1997 with attempted recompletions and potential sidetrack
operations or new well bores.
For the three months ended March 31, 1997, the total oil, natural
gas and oil trading revenues less operating and Net Profits expense (the
"Gross Cash Margin from Properties") for Platform B was $4.9 million or
38% of the total Gross Cash Margin from Properties of $12.7 million for
the Company. The Gross Cash Margin from Properties from Well B-20S, the
only well currently producing from the U-1/1 reservoir, was $3.9
million. For the years ended December 31, 1996 and 1995, the Gross Cash
Margin from Properties from Platform B was 46% and 69%, respectively, of
the total Gross Cash Margin from Properties. Thus Platform B is
contributing a smaller proportion of the Company's Gross Cash Margin
from Properties each quarter. Unforeseen mechanical, reservoir or other
failure of wells located in the U-1/1 reservoir could potentially have
an immediate and significant impact on the Company's revenue, net
income and net cash flow from operations.
The Company understands that the operator, a working interest
partner, and the gas purchaser are engaged in a dispute concerning their
long-term gas sales contracts (which are similar to the Company's
contract) covering production from South Pass Block 89 . The dispute
appears to be about substituting natural gas production in accordance
with the terms of the long-term gas sales contract from South Pass Block
89 with natural gas production from South Pass Block 87 which is a
source of equal or greater natural gas reserves and deliverability
capacity. The effect on the Company's long-term gas sales contract
cannot be determined at this time.
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
1997 decreased by 44% to $4.8 million from $8.6 million for the same
three-month period in the prior year. The largest two capital
expenditures during the first quarter of 1997 included $1.3 million for
the Gladdis Knight 32-14 #1 and #2 wells on the Moselle Dome prospect
and $1.2 million for Wells B-12S and B-7S on South Pass Block 89. In
addition, the Company began fabrication for a four-pile, six-slot
production platform to be located in Eugene Island Block 135. This
platform is designed to have production capacity of 75 MMcfgd. The
Company has a 15% working interest in this field.
During the 1997 Outer Continental Shelf Central Gulf of Mexico
Lease Sale, in an effort to possibly extend the discovery, the Company
along with two other bidding partners submitted the high bids on Eugene
Island Blocks 153 and 154 which are contiguous blocks to the south of
Eugene Island Block 135. In addition to the two blocks in Eugene Island,
the Company submitted the high bids on four additional blocks during the
same sale in March 1997. Two of these blocks have been awarded the
remaining blocks are pending a review by the United States Department of
Interior's Minerals Management Service.
The Company's capital investment and exploration budget for 1997 is
currently $39.8 million, which includes budgeted amounts for
acquisition, exploration and development activities totaling $25.8
million for the Gulf of Mexico, $6.2 million for Mississippi/Alabama,
$2.5 million for West Texas/New Mexico and $5.3 million for South Texas
areas. The Company's 1997 plans include drilling prospects on South
Timbalier Blocks 214, 247 and 279 for a total cost of $6.2 million and
two additional wells and the production platform in Eugene Island Block
135 for an expected cost of $3.7 million. Also included in the 1997
capital and exploration budget is $15.9 million for an additional six
offshore wells including one U-sand well in South Pass Block 89. The
Company plans to drill at least four additional wells in 1997 on the
Moselle Dome prospect at an estimated cost of $2.3 million. In addition
to the Moselle Dome wells, the Company expects capital expenditures in
the Mississippi/Alabama area to include drilling two exploratory wells
for $1.0 million on identified prospects in 1997 and has budgeted $1.0
million to drill three additional prospects currently being evaluated.
The Company expects to spend approximately $1.6 million on leases and
seismic expense for 1997 in the Mississippi/Alabama Area. At least six
exploration wells are planed in the South Texas area in 1997 and five
prospects have been identified in the West Texas/New Mexico area.
Capital may be reallocated based on economic conditions, partner
constraints or property acquisitions that may be presented to the
Company.
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.
The Company's $25.0 million line of credit facility will expire in
June 1997, at which time the Company expects to renew the line of credit
or replace it with another line of credit with 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 $250,000
against this line of credit in connection with the Company's oil and gas
leases in the Gulf of Mexico.
In December 1992, the Company issued $55.1 million of 8 1/4%
Convertible Subordinated Notes which are currently outstanding and due
December 1, 2002 ("Notes"). In the event of a "change in control" as
defined in the Indenture for the Notes (the "Indenture"), the Company is
required to make an offer to repurchase the Notes at 100% of the
principal amount thereof, plus accrued interest. Box Brothers Holding
Company ("BBHC") owns 57% of the Class A Stock of the Company. A sale
or other disposition of those shares to any entity, person or group of
persons not controlled by, or outside of, Don D. Box, Gary D. Box,
Douglas D. Box and Thomas D. Box, would constitute a "change in control"
under the Notes. In addition, if a receiver of BBHC is appointed in the
Thomas D. Box lawsuit or otherwise, a "change in control" could be
deemed to have occurred. The Indenture also defines a "change in
control" to have occurred if at any time the existing Board of Directors
does not have at least three independent directors as defined in the
Indenture.
On April 29, 1997, the Company lent BBHC an aggregate of $7.25
million. The loan is payable on or before May 29, 1997, bears interest
at a rate per annum equal to the prime rate of Texas Commerce Bank, plus
1.00%, and is collateralized by a pledge of the shares of Class A Stock
and the stock of CKBP and Associates owned by BBHC. The loan and its terms
were approved by all of the Company's directors who are not affiliated or
associated with BBHC. The proceeds of the loan were used by BBHC to
retire existing indebtedness secured by the pledge of Class A Stock
owned by BBHC. Under one of the pledge agreements securing the retired
indebtedness, the institution of proceedings for the appointment of a
receiver for BBHC gave the holder of the indebtedness the right to
accelerate the indebtedness and foreclose on the collateral, which could
have resulted in a "change of control" under the Indenture. Since an
action is pending to appoint a receiver for BBHC, the Board considered
it advisable and appropriate to facilitate a refinancing of BBHC's
indebtedness. See Note 4. Notes to the Financial Statements -
Contingencies - Thomas D. Box Lawsuit. Provided that a disinterested
majority of the Company's Board of Directors is satisfied that the loan
is on terms fair to the Company and that BBHC can service the loan, the
Company expects to convert the loan at maturity into a one-year term
loan with the same interest rate and collateral. Because the market
value of the collateral is in excess of 200% of the loan amount, the
Company believes that it will collect the loan in full, together with
all accrued interest.
If a "change in control" were to occur the Company may not have the
current liquidity to repurchase the Notes if all were tendered, and
certain debt covenants in the $25.0 million credit facility regarding
current ratios may not be met. Therefore, the credit line may not be
available without a debt covenant waiver or renegotiation of the credit
facility. In addition, the capital resources needed to implement the
long-term strategy would be reduced to reliance on cash flow from
operations in the short term.
The Company and Phillips Petroleum Company are engaged in
litigation concerning the NPI in South Pass Block 89. The trial
commenced with the presentation of evidence which concluded on April 16,
1997. The court has instructed the parties to file post trial briefs,
after which the case will be argued and the court will make its decision
which is expected in June of 1997. If an adverse judgment or settlement
occurs, the Company believes that there could be a significant impact on
its cash flow from operations and the current liquidity of its balance
sheet.
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 1997 was $1.8 million, or $0.09
per share, constituting a 25% decrease when compared to net income of
$2.4 million, or $0.12 per share, during the first quarter of 1996. This
decrease primarily resulted from lower total revenues primarily from
South Pass Block 89, partially offset by a decrease in total costs and
expenses.
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 1997 and 1996
were as follows:
Three Months Ended March 31, Increase
1997 1996 (Decrease)
----------- ------------ ----------
Net sales volumes:
Oil (Bbls): 254,000 242,000 12,000
Natural gas (Mcf): 1,793,000 1,810,000 (17,000)
Average sales prices:
Oil (per Bbl) $ 20.68 $ 18.31 $ 2.37
Natural gas (per Mcf) $ 6.01 $ 7.45 $ (1.66)
Natural gas sales decreased $2.7 million or 20% primarily as a
result of decreased natural gas production from South Pass Block 89
Platform B, partially offset by an increase in production from other
properties and an increase in the contract gas price for natural gas
sales from South Pass Block 89. In March 1996, Well B-11S located on
South Pass Block 89 Platform B began to produce 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. The Company unsuccessfully
attempted to replace this well during 1996. As a result, the natural gas
sales from Platform B decreased $4.6 million. However, natural gas
production from Platform C producing from South Pass Blocks 86 and 89,
Platform D producing from South Pass Block 87 and West Delta Block 128
and production from Main Pass Block 262 increased by 454,000 Mcf for the
three months ended March 31, 1997 compared to the same period in the
prior year which offset the decrease in gas sales from Platform B by
$1.3 million. Also partially offsetting the decrease was an increase in
the contract price for natural gas sales from South Pass Block 89
subject to the long-term gas sales contract which increases 10% per year
and resulted in additional natural gas sales totaling $699,000.
Oil sales increased $830,000 or 19% as a result of an increase in
the average oil prices and an increase in oil sales volume. Average oil
prices increased $2.37 or 13% from $18.31 for the three months ended
March 31, 1996 to $20.68 for the three months ended March 31, 1997 which
increased oil sales $579,000. Oil production from new properties
totaling 7,900 barrels added an additional $158,000 to oil sales and
another 4,500 barrel increase from existing properties added $93,000 to
oil sales.
The decrease in Net Profits expense primarily resulted from lower
natural gas revenues in the amount of $3.8 million from South Pass Block
89. Natural gas revenues from this block for the three month period
ended March 31, 1997 were $7.9 million, compared to $11.7 million for
the same period in the prior year. Capital costs and operating expenses
for South Pass Block 89 increased almost $1.3 million in the first
quarter of 1997 when compared to the first quarter of 1996 as a result
of drilling costs incurred for Platform B Well B-11S and Well B-9S. The
total decrease in the Net Profits account was $5.3 million, of which
33%, which is the percentage paid as Net Profits, is $1.8 million.
The most significant reasons for the decrease in exploration
expenses were lower dry hole costs in the amount of $690,000 in the
first quarter of 1997 compared to the first quarter of the prior year and a
decrease in the 2-D and 3-D seismic expenditures from $828,000 in the
first quarter of 1996 to $433,000 in the first quarter of 1997.
The cost base subject to depreciation, depletion and amortization was
higher in the first quarter of 1997 compared to 1996 because of new
properties becoming producing properties after the first quarter of
1996. In addition, a decrease in oil and natural gas reserves in South
Pass Block 89 and an increase in production from South Pass Block 87
contributed to an increase in the depreciation, depletion and amortization
expense.
General and administrative expenses not including legal expenses
were $1.6 million for the first quarter of 1997 compared to $1.8 million
for the first quarter of 1996 which was a 9% decrease. The primary reason
for the decrease related to lower salaries and payroll tax expense which
decreased by $204,000. Legal expenses, mainly due to cost associated
with the Phillips litigation, were $891,000 versus $158,000 in the first
three months of 1996.
A "change in control" occurred when BBHC replaced the then-existing
Board of Directors by a written consent effective July 30, 1996. The
"change in control" triggered the applicability of severance agreements
which then resulted in the payment of severance benefits in applicable
situations. Expenses incurred pursuant to the severance agreements
during the first quarter of 1997 were charged to reorganization costs.
Income taxes decreased during the first quarter of 1997 compared to the
first quarter of 1996 as a result of lower income before taxes.
<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, Notes to the Financial
Statements - Note 4. Contingencies 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
On April 16, 1997 the Board of Directors appointed John E. Goble,
Jr. and William E. Greenwood to fill the two existing vacancies on the
Board of Directors. On April 25, 1997 Richard D. Squires resigned from the
Board of Directors and on April 28, 1997 David Preng was appointed to
the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1* Certificate of Incorporation, as amended.
3.2++ By-Laws as amended.
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* Farmout Agreement with Aminoil USA, Inc., effective May
1, 1977, dated May 9, 1977.
10.4* Transportation Agreement with CKB Petroleum, Inc. dated
March 1, 1985, as amended on April 19, 1989.
10.5* Agreement of Compromise and Amendment to Farmout
Agreement, dated July 3, 1989.
10.6* Settlement Agreement with Texas Eastern Transmission
Corporation, dated November 14, 1990.
10.7* Guarantee of Panhandle Eastern Corporation, dated
November 21, 1990.
10.8* Bill of Sale and Assumption of Obligations from OKC
Limited Partnership, dated April 15, 1992.
10.9* Asset Purchase Agreement, dated April 15, 1992.
10.10* 1992 Incentive Stock Option Plan of Box Energy
Corporation.
10.11* 1992 Non-Qualified Stock Option Plan of Box Energy
Corporation.
10.12** Pension Plan of Box Energy Corporation, effective April
16, 1992.
10.13# First Amendment to the Pension Plan of Box Energy
Corporation dated December 16, 1993.
10.14## Second Amendment to the Pension Plan of Box Energy
Corporation dated December 31, 1994.
10.15+ Form of Executive Severance Agreement dated as of
December 12, 1995 by and between Box Energy Corporation
and key employees.
10.16+ 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.
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, 1997.
---------------
*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.
++Incorporated by reference to the Company's Form 10-K (file number
1-11516) for the fiscal year ended December 31,1996 filed with the
Commission and effective on or about March 30, 1997.
<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 14, 1996 By: (Don D. Box)
------------------ ------------------------------
Don D. Box
Chief Executive Officer
Date: May 14, 1996 By: (J. Burke Asher)
------------------ ------------------------------
J. Burke Asher
Chief Accounting Officer
BOX ENERGY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11.1
(In thousands, except per share amounts)
Three Months Ended March 31,
1997 1996
---------- ----------
Net income for primary income per share $ 1,807 $ 2,417
Interest expense on 8 1/4% convertible
subordinated notes 1,120 1,133
Income tax effect (assumed to be 35%) (392) (397)
---------- ----------
Net income for fully-diluted income
per share $ 2,535 $ 3,153
========== ==========
Primary income per share $ 0.09 $ 0.12
========== ==========
Fully-diluted income per share $ 0.10 $ 0.12
========== ==========
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 0 3
---------- ----------
Total shares used for primary income
per share 20,803 20,806
Contingent shares from remaining stock
options granted 310 619
Contingent shares from 8 1/4% convertible
subordinated notes 5,007 5,007
---------- ----------
Total shares used for fully-diluted
income per share 26,120 26,432
========== ==========
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,640
<SECURITIES> 31,220
<RECEIVABLES> 7,137
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,564
<PP&E> 194,601
<DEPRECIATION> 121,592
<TOTAL-ASSETS> 138,919
<CURRENT-LIABILITIES> 7,821
<BONDS> 55,077
0
0
<COMMON> 20,803
<OTHER-SE> 55,218
<TOTAL-LIABILITY-AND-EQUITY> 138,919
<SALES> 16,034
<TOTAL-REVENUES> 17,227
<CGS> 10,520
<TOTAL-COSTS> 13,222
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,225
<INCOME-PRETAX> 2,780
<INCOME-TAX> 973
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<EPS-PRIMARY> .09
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