SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q/A-1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended_______________________________________________
Commission file number: 0-10990
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CASTLE ENERGY CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0035225
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Radnor Corporate Center, Suite 250,
100 Matsonford Road, Radnor,
Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 995-9400
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
-- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,693,646 shares of
Common Stock, $.50 par value.
CASTLE ENERGY CORPORATION
INDEX
Page #
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Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - December, 31, 1995
(Unaudited) and September 30, 1995....................................................... 1
Consolidated Statements of Operations - Three Months
Ended December 31, 1995 and 1994 (Unaudited)............................................. 2-3
Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1995 and 1994 (Unaudited)............................................. 4
Consolidated Statements of Stockholders' Equity - Year
Ended September 30, 1995 and Three Months Ended
December 31, 1995 (Unaudited)............................................................ 5
Notes to the Consolidated Financial Statements (Unaudited)............................... 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 10-12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................................... 13
Signatures .................................................................................................... 14
Exhibit 11.1 Statement Re: Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
("000's" Omitted Except Share Amounts)
December 31, September 30,
1995 1995
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents................................................. $ 4,879 $ 5,341
Restricted cash........................................................... 7,279 4,959
Accounts receivable....................................................... 7,629 5,641
Prepaid expenses and other current assets................................. 220 153
Deferred income taxes..................................................... 4,623 4,623
Estimated realizable value of discontinued net refining assets............ 10,803 10,803
-------- --------
Total current assets.................................................... 35,433 31,520
Property, plant and equipment, net:
Natural gas transmission.................................................. 22,276 22,720
Furniture, fixtures and equipment......................................... 262 276
Oil and gas properties, net................................................... 16,798 17,410
Gas contracts, net............................................................ 32,172 34,515
Other assets, net............................................................. 411 463
Note receivable............................................................... 10,000 10,000
-------- --------
Total assets............................................................ $117,352 $116,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 4,843 $ 12,080
Current portion of long-term debt - related party......................... 125 250
Accounts payable.......................................................... 6,372 4,715
Accrued expenses.......................................................... 3,049 3,284
Other liabilities......................................................... 3,439 3,323
Net refining liabilities retained......................................... 19,709 20,342
-------- --------
Total current liabilities............................................... 37,537 43,994
Long-term debt................................................................ 25,027 23,616
Other long-term liabilities................................................... 83 83
Deferred income taxes......................................................... 7,574 7,574
-------- --------
Total liabilities....................................................... 70,221 75,267
-------- --------
Commitments and contingencies
Stockholders' equity:
Series B participating preferred stock; par value - $1.00; 10,000,000 shares
authorized; no shares issued
Common stock; par value - $0.50; 25,000,000 shares authorized;
6,693,646 shares issued and outstanding................................. 3,347 3,347
Additional paid-in capital.................................................... 66,316 66,316
Accumulated deficit........................................................... (22,532) (28,026)
-------- --------
47,131 41,637
-------- --------
Total liabilities and stockholders' equity.............................. $117,352 $116,904
======== ========
The accompanying notes are an integral part of these financial statements
-1-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
Three Months Ended December 31,
-------------------------------
1995 1994
---- ----
Revenues:
Natural gas marketing and transmission:
Gas sales............................................................ $15,840 $20,055
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15,840 20,055
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Exploration and production:
Oil and gas sales.................................................... 2,071 2,217
Well operations...................................................... 131 142
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2,202 2,359
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18,042 22,414
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Expenses:
Natural gas marketing and transmission:
Gas purchases........................................................ 8,741 11,322
Operating costs...................................................... 256 267
General and administrative........................................... 244 270
Depreciation and amortization........................................ 2,846 2,846
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12,087 14,705
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Exploration and production:
Oil and gas production............................................... 734 681
General and administrative........................................... 220 203
Depreciation, depletion and amortization............................. 631 747
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1,585 1,631
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Corporate general and administrative expenses.......................... 1,144 1,294
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14,816 17,630
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Operating income........................................................... 3,226 4,784
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(Continued on next page)
The accompanying notes are an integral part of these financial statements
-2-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
("000's" Omitted Except Share Amounts)
(Unaudited)
Three Months Ended December 31,
-------------------------------
1995 1994
---- ----
Other income (expenses):
Interest income....................................................... $ 231 $ 257
Other income (expense) ............................................... 2,744 (55)
Interest expense...................................................... (707) (1,279)
-------- ----------
2,268 (1,077)
-------- ----------
Net income before provision for income taxes.............................. 5,494 3,707
-------- ----------
Provision for income taxes related to continuing operations:
State............................................................. 4,180
Federal........................................................... 27,468
-------- ----------
31,648
-------- ----------
Income (loss) from continuing operations.................................. 5,494 (27,941)
Income from discontinued refining operations less applicable
income taxes of $0 and $28,015, in 1995 and 1994,
respectively.......................................................... 42,025
-------- ----------
Net income................................................................ $ 5,494 $ 14,084
======== ==========
Net income (loss) per share:
Income (loss) per share from continuing operations - primary.......... $ .82 ($ 3.90)
======== ==========
- fully diluted................................................. $ .82 ($ 3.90)
======== ==========
Income per share from discontinued refining operations
- primary....................................................... $ -- $ 5.87
======== ==========
- fully diluted................................................. $ -- $ 5.87
======== ==========
Net income per share - primary........................................ $ .82 $ 1.97
======== ==========
- fully diluted................................................. $ .82 $ 1.97
======== ==========
Weighted average number of common and common
equivalent shares outstanding - primary........................... 6,711,741 7,157,160
========== ==========
- fully diluted................................................. 6,717,043 6,978,024
========== ==========
The accompanying notes are an integral part of these financial statements
-3-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
("000's" Omitted)
(Unaudited)
Three Months Ended December 31,
-------------------------------
1995 1994
---- ----
Net cash flow provided by (used in) operating activities......................... $ 12,875 $ (911)
-------- ----------
Cash flows from investing activities:
Investment in refining plant.................................................. (20,480)
Investment in oil and gas properties.......................................... (15) (3,857)
Investment in pipelines....................................................... (23) (4)
Purchase of furniture, fixtures and equipment................................. (115)
-------- --------
Net cash used in investing activities............................... (38) (24,456)
-------- --------
Cash flows from financing activities:
Proceeds of long-term debt..................................................... 41,481
Repayment of long-term debt.................................................... (14,658) (12,646)
-------- --------
Net cash provided by (used in) financing activities...................... (14,658) 28,835
-------- --------
Net increase (decrease) in cash and cash equivalents.............................. (1,821) 3,468
Cash and cash equivalents - beginning of period................................... 6,710 18,118
-------- --------
Cash and cash equivalents - end of period......................................... $ 4,889 $ 21,586
======== ========
Supplemental disclosures of cash flow information are as follows:
Cash paid during the period:
Interest....................................................................... $ 718 $ 1,564
======== ========
Income taxes................................................................... $ 500 $ 143
======== ========
Payment of related party payables in exchange for reduction in cash
participations............................................................. $ 6,862
========
MG Settlement, including surrender of 969,000 common shares, cancellation of
debt obligations and the assumption by MG of the forward sale obligations
and Societe Generale loan................................................... $396,166
========
Unrealized portion of estimated realizable value of discontinued net
refining assets............................................................ $ 6,803
=======
The accompanying notes are an integral part of these financial statements
-4-
CASTLE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
("000's" Omitted Except Share Amounts)
(Unaudited)
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital (Deficit) Total
--------- --------- ---------- ----------- -----
Balance - October 1, 1994............. 7,627,646 $3,814 $75,754 ($41,648) $37,920
Stock acquired........................ (969,000) (485) (9,622) (1,275) (11,382)
Options exercised..................... 35,000 18 184 202
Net income............................ 14,897 14,897
--------- ------ ------- -------- -------
Balance - September 30, 1995.......... 6,693,646 3,347 66,316 (28,026) 41,637
Net income............................ 5,494 5,494
--------- ------ ------- -------- -------
Balance - December 31, 1995........... 6,693,646 $3,347 $66,316 ($22,532) $47,131
========= ====== ======= ======== =======
The accompanying notes are an integral part of these financial statements
-5-
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Preparation
The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month period ended December 31, 1995 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 1996.
These unaudited consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1995.
Reference should be made to such Form 10-K for capitalized (defined) terms used
herein.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month periods ended December 31, 1995 and 1994 and
for a fair statement of financial position at December 31, 1995.
Note 2 - September 30, 1995 Balance Sheet
The amounts presented in the balance sheet as of September 30, 1995
were derived from the Company's audited consolidated financial statements which
were included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
Note 3 - Acquisition
In October 1994, one of the Company's exploration and production
subsidiaries purchased certain royalty interests held by ARCO in wells purchased
by another of the Company's exploration and production subsidiaries from ARCO in
December 1992. The purchase price was $3,823.
Note 4 - Discontinued Operations
In 1994, the Company decided to discontinue the operations of its
refining business and to sell or retire its two refineries.
In July 1995, operations ceased at the Powerine Refinery and the
Company retired the assets of the Powerine Refinery. On September 29, 1995,
Powerine Oil Company ("Powerine"), the refining subsidiary owning the Powerine
Refinery, sold (for legal purposes) substantially all of the refining plant
assets to Kenyen Projects Limited ("Kenyen"), retaining certain rack facilities
and the land on which the Powerine Refinery is situated and certain other
assets. The purchase price was $22,763 consisting of $3,000 cash and a note for
$19,763. The note was due in three equal installments of principal and interest
-6-
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
of $7,108 (of which $19,763 is principal) on April 30, June 30 and September 30,
1996. On January 16, 1996, Powerine merged into a subsidiary of Energy Merchant
Corp. ("EMC"). As part of the sale, EMC also indemnified Powerine and the
Company for any and all environmental liabilities of Powerine. Subsequent to
January 16, 1996, the financial press reported that EMC had acquired the
Powerine Refinery from Kenyen.
On September 30, 1995, operations also ceased at the Indian Refinery
and the Company retired the plant assets of the Indian Refinery. On December 12,
1995, the Company sold the plant assets of the Indian Refinery to American
Western Refining L.P., a subsidiary of Gadgil Western Corporation ("American
Western"). The purchase price was $8,000, including $3,000 cash and a note for
$5,000. The note bears interest at 8% and is due on the earlier of October 31,
1996 or the date American Western obtains financing to restart the Indian
Refinery. The note is secured by the real property and the Indian Refinery.
American Western also assumed certain liabilities of Indian Refining Limited
Partnership ("IRLP"), the owner of the Indian Refinery, including employee
pension liabilities and all environmental liabilities, in conjunction with the
sale. The Company also sold certain precious metal catalysts to American Western
for a note for $1,803.
As a result of the discontinuance of refining operations, all assets
and liabilities related to the refining segment have been netted. The realizable
value of net refining assets sold subsequent to December 31, 1995 is shown under
the caption "Estimated realizable value of discontinued net refining assets" on
the accompanying Consolidated Balance Sheet. The estimated value of the refining
liabilities retained is shown under the caption "Net refining liabilities
retained."
Note 5 - Contingencies
Long-Term Supply Agreement
In 1993, IRLP entered into a Long-Term Supply Agreement (the "LTSA")
with Shell Canada Limited and Salmon Resources Ltd. (collectively "Shell") for
the supply of Caroline Condensate feedstock to the Indian Refinery. MGRM agreed
to be the alternate purchaser under the LTSA in the event IRLP should fail to
perform. On December 23, 1994, Shell filed suit in the United States District
Court for the Northern District of Illinois against IRLP and MGRM (the "Shell
Litigation"). The complaint alleged that MGRM failed to provide Shell with
adequate assurances, pursuant to a request under the Illinois Commercial Code,
concerning its role as "alternate purchaser" under the LTSA, and that as a
result, MGRM repudiated the LTSA pursuant to provisions of the Illinois
Commercial Code. The complaint further alleged that the LTSA should be
terminated because its purpose has been frustrated and the performance has
become impossible.
On October 2, 1995, Shell unilaterally terminated its performance under
the LTSA and ceased delivering Caroline Condensate to the Indian Refinery. On
January 16, 1996, Shell filed an amended complaint, which adds a claim for
$10,000 in damages based upon alleged undercharges and other breaches of the
LTSA. Management believes the claim of Shell is without merit.
On December 12, 1995, IRLP sold the Indian Refinery to American
Western. As part of the sale, American Western assumed all liabilities and
expenses associated with the LTSA litigation. American Western is currently
defending this litigation and has filed a counterclaim against Shell in the
amount of $100,000.
-7-
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Powerine Arbitration
On April 14, 1995, Powerine repaid all of the indebtedness owed by it
to MGTFC, including $10,828 of disputed amounts (the "Disputed Amount"). On the
same day, the Company and two of its subsidiaries and MG and two of its
subsidiaries entered into the Payoff Loan and Pledge Agreement ("Payoff
Agreement"), which provided the following:
a. MG released Powerine from all liens and claims.
b. MG loaned the Company $10,000.
c. Powerine transferred its claim with respect to the Disputed
Amount to the Company.
d. The claim with respect to the disputed Amount was submitted to
binding arbitration (the "Powerine Arbitration").
e. MG can offset the $10,000 loan to the Company against the $10,000
note it issued to the Company as part of the MG Settlement, to the
extent the arbitrator decides the claim with respect to the
Disputed Amount in MG's favor.
The Disputed Amount relates primarily to disputes over the prices paid
by subsidiaries of MG for 388,500 barrels of refined products lifted by MG's
subsidiary, MGRM, and nonpayment for refined products that were processed after
January 31, 1995 and that MGRM was obligated to, but did not, lift and pay for.
To the extent that the arbitrator decides in favor of the Company, the Company's
note to MG will be reduced and the net amount due to the Company from MG will be
increased. If the arbitrator settles the Disputed Amount entirely in the
Company's favor, the Company's note to MG will be cancelled and MG will still
owe the Company its $10,000 note (due October 14, 1997). If the arbitrator
settles the Disputed Amount entirely in MG's favor, the Company's note from MG
will be discharged. In such case the Company's future earnings will also be
adversely impacted since the Company has not recorded any reserve against the
note.
On September 8, 1995, the Company filed its Statement of Claim and
Memorandum. On December 6, 1995, MG filed its Notice of Defense and Response to
Claimant's Statement of Claim and Memorandum. The Company filed a reply on
February 14, 1996 and the parties are proceeding with discovery as to the amount
of damages. The Company expects the arbitration to be settled during the fourth
quarter of fiscal 1996.
In January 1996, MG did not pay interest on the $10,000 note when such
interest was due. As a result, the entire note is due to be paid to the escrow
account for the Powerine Arbitration. The Company has demanded that MG pay the
entire note.
-8-
Castle Energy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Swap Agreement
In April 1995, IRLP terminated a Natural Gas Swap Agreement (the "Swap
Agreement"), dated October 14, 1994 between MGNG and IRLP, claiming the right to
do so based on breaches of other agreements by MG and its affiliates. MGNG
disregarded IRLP's termination notice and sent IRLP a termination notice
alleging IRLP was the defaulting party and claiming approximately $1,200 of
losses. IRLP has refused to pay MGNG's claim. In June 1995, MGRM, as MGNG's
assignee, filed a complaint in Delaware state court, claiming $1,356 plus
interest under the Swap Agreement. IRLP has answered the complaint. The
Company's management believes that IRLP has good defenses to that claim, expects
to prevail and expects to recover its $707 receivable.
Note 6 - Stockholder Litigation Recovery
In December 1995, the Company received $2,725 from a plaintiff class
escrow fund related to stockholder litigation. The parties reached a settlement
with respect to the stockholder litigation in October 1994. The proceeds to the
Company represent unclaimed funds that were to revert to the Company pursuant to
the Settlement Order for the litigation. The recovery is shown as "Other Income"
in the Consolidated Statement of Operations.
Note 7 - Subsequent Events
In March 1996, the Company received a commitment letter from a bank for
a credit facility of $3,800. The credit facility is to be collateralized by the
Company's exploration and production assets and a second lien on the Company's
natural gas marketing and transmission assets and is to be payable as a term
loan over seventeen months. The Company and the bank are currently concluding
the documentation of the credit facility.
On March 5, 1996, the Company engaged Lazard Freres & Co., LLC to
explore strategic alternatives to enhance stockholder value and to act as the
Company's exclusive advisor. The alternatives that may be recommended include
the sale of assets, the sale of the Company, a merger with or joint venture with
another company or other restructuring measures. If such is the case, future
operations of the Company may be different from current operations.
On January 16, 1996, Powerine merged into a subsidiary of EMC (see Note
4 above).
In connection with the sale of the Indian Refinery to American Western
in December 1995, one of the Company's subsidiaries sold platinum to American
Western for cash and a promissory note in the principal amount of $1,803. The
note was originally due on February 11, 1996, but the Company extended the note
to March 22, 1996 and thereafter refrained from seeking to collect on the note
to allow American Western time to obtain financing. In April 1996, American
Western informed the Company that American Western had obtained a commitment
from a financial institution to provide such financing; however, the closing of
such financing has still not occurred. As a result, the Company's subsidiary,
which has a first security interest in the platinum, is considering alternatives
with respect to the collection of the note. The Company estimates that, as of
May 1, 1996, the market value of the collateral was in excess of $2,200 and
accordingly does not expect a loss in liquidating the note.
As part of the purchase price for the Indian Refinery, IRLP received
from American Western a promissory note in the principal amount of $5,000, due
the earlier of October 31, 1996 or the date American Western obtains financing
to restart the Indian Refinery. Under the terms of the note and a related escrow
agreement, American Western was obligated to make quarterly interest payments on
the note into an escrow fund held for the benefit of the creditors of IRLP. To
date, no interest payments have been made. Accordingly, IRLP is considering
options available to it under the note and related agreements, including
foreclosure on the assets securing the note. If American Western does not pay
the note, IRLP will not have funds to pay its trade creditors. Under such
circumstances, IRLP may have to foreclose on and sell the Indian Refinery assets
to obtain payment on the note or, failing same, consider filing a voluntary
petition for bankruptcy.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
As noted previously, the Company discontinued its refining operations
by September 30, 1995. As a result, management's discussion and analysis focuses
on the Company's continuing operations -- natural gas marketing and transmission
and exploration and production. All references herein to dollars are in
thousands.
Revenues
Natural Gas Marketing and Transmission
Gas sales from natural gas marketing decreased $4,215 or 21% from the
first quarter of fiscal 1995 to the first quarter of fiscal 1996. Under the
Company's long-term gas sale contract with Lone Star Gas Company ("Lone Star
Contract"), the price received for gas is essentially fixed through May 31,
1999. The variance in gas sales, therefore, is almost entirely attributable to
the volumes of gas delivered. Although the volumes sold to Lone Star annually
are essentially fixed (the Lone Star Contract has a take-or-pay provision), the
Lone Star Contract year is from February 1 to January 31 whereas the Company's
fiscal year is from October 1 to September 30. Furthermore, although the volumes
to be taken by Lone Star in a given contract year are fixed, there is no
provision requiring fixed monthly or daily volumes and deliveries accordingly
vary with Lone Star's seasonal and peak demands. Such variances have been
significant. As a result, Lone Star deliveries, although fixed for a contract
year, may be skewed and not proportional for the Company's fiscal periods. Lone
Star deliveries and sales for the first quarter of fiscal 1996 approximated
those which would have occurred if daily takes under the Lone Star Contract had
been fixed and equal. In the first quarter of fiscal 1995 Lone Star deliveries
exceeded those which would have occurred if daily takes had been fixed and equal
by approximately 27%.
Exploration and Production
Oil and gas sales decreased $146 or 6.6% from the first quarter of
fiscal 1995 to the first quarter of fiscal 1996. The decrease is primarily
attributable to decreased production since the Company has not made any
significant investment in oil and gas properties since October of 1994. The
Company is, however, considering drilling several new wells if it is able to
obtain the necessary financing and if the Board of Directors does not decide to
sell the Company's exploration and production assets. (See Note 6 to the
financial statements included in Part I.)
Expenses
Natural Gas Marketing and Transmission
Gas purchases decreased $2,581 or 22.8% from the first quarter of
fiscal 1995 to the first quarter of fiscal 1996. This decrease compares to a 21%
decrease in natural gas sales for the same periods. For the quarter ended
December 31, 1994, gas purchases comprised 56.5% of gas sales versus only 55.2%
of gas sales for the quarter ended December 31, 1995. The decrease in gas
purchases as a percentage of gas sales is primarily attributable to the
percentage of gas purchased from nonoperating owners in wells operated by the
Company. In fiscal 1996, such gas purchases constituted a larger percentage of
total gas purchases and were at prices lower than the cost of gas purchased
under the Company's long-term gas purchase contract with MG Natural Gas Corp.
("MGNG"), a subsidiary of Metallgesellschaft Corp.
-10-
Exploration and Production
Oil and gas production (lease operating) expenses increased $53 or 7.8%
from the first quarter of fiscal 1995 to the first quarter of fiscal 1996. Such
expenses constituted 35.4% of oil and gas sales during the first quarter of
fiscal 1996 versus 30.7% of oil and gas sales during the first quarter of fiscal
1995. Such increase is anticipated since the Company's oil and gas reserves are
maturing and the costs to produce mature reserves generally exceeds that to
produce recently developed reserves. Nevertheless, oil and gas production
expenses typically do not occur evenly throughout the year and a comparison of
expenses for annual fiscal years is more indicative of future results.
Depreciation, depletion and amortization decreased $116 or 15.5% from
the first quarter of fiscal 1995 to the first quarter of fiscal 1996. Such
decrease parallels the decrease in production.
Corporate
Corporate general and administrative costs decreased $150 or 11.6% from
the first quarter of fiscal 1995 to the first quarter of fiscal 1996. The
decrease is primarily attributable to decreased salaries and bonuses. The
decrease in salaries is due to a reduction in personnel. The decrease in bonuses
is due to the termination of the Company's Retention Bonus Program effective
December 31, 1994.
Other Income (Expenses)
Other income increased $2,799. Of this amount, $2,725 represented
recoveries from a plaintiff class escrow fund related to stockholder litigation.
The parties reached a settlement with respect to the stockholder litigation in
October 1994. The proceeds to the Company represent unclaimed funds that were to
revert to the Company pursuant to the Settlement Order for the litigation.
Interest expense decreased $572 or 44.7% from the first quarter of
fiscal 1995 to the first quarter of fiscal 1996. The decrease is primarily
attributable to the decrease in debt owed to General Electric Credit Corporation
("GECC"), the Company's natural gas marketing and transmission lender. This debt
constituted over 95% of the Company's debt applicable to continuing operations
in both quarters being compared and has a fixed annual interest rate of 8.33%.
TAX PROVISIONS
The tax provision allocated to continuing operations for the quarter
ended December 31, 1994 has been determined pursuant to "Financial Accounting
Standards 109 -- Accounting for Income Taxes" ("FAS/109"). The $31,952 provision
against pretax income from continuing operations of $4,468 results primarily
because of the creation of a valuation reserve for deferred taxes at December
31, 1994. Previously, the Company had recorded deferred tax assets on all of its
tax carryforwards in anticipation of selling its refineries to CORE Refining
Corp. ("CORE") in a transaction that would have created taxable income.
Subsequent to December 31, 1994, the CORE transaction failed and the valuation
reserve was created because it then became probable that the Company would not
be liable for taxes in fiscal 1995 as originally estimated. The management of
the Company believes that the intraperiod tax provision allocation between
-11-
continuing and discontinued operations is misleading because the tax rate
applicable to continuing operations does not approximate the tax rate expected
by the Company in future tax years.
No tax provision was required for the quarter ended December 31, 1995
because, as a result of strategies being pursued that will more likely than not
generate taxable income, management believes the Company will utilize some of
its tax carryforwards during the current year resulting in a projected annual
tax rate of zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company previously indicated that its cash requirements for the
period March 1, 1996 to September 30, 1996 were approximately $2,875 (see Item 7
to Form 10-K for the year ended September 30, 1995). Subsequently, the Company
received a commitment for $3,800 from a bank. The Company and the bank are
currently negotiating the documentation for the commitment and the Company
anticipates that the commitment will be funded in early April 1996. The Company
believes that the funds from the bank commitment and non-committed funds
generated by the Company's exploration and production operations will meet the
Company's ongoing cash requirements until the Company has repaid or refinanced
its natural gas marketing and transmission debt. All cash flow from natural gas
marketing and transmission operations is dedicated to this debt and thus not
available for other corporate requirements/investments. The Company anticipates
that this debt will be repaid by January 1997 and then the Company will receive
the cash flow from natural gas marketing and transmission operations - currently
approximately $22,500 per year.
The Company has also received a preliminary commitment from the bank
for a $30,000 facility. Under the terms of such facility the proceeds would be
used to refinance the natural gas marketing and transmission debt, the $3,800
commitment and for new drilling but such debt would be repaid over a longer
period and only 35% - 40% of the cash flow would be dedicated to debt service -
instead of 100% of cash flow as is presently the case. If the Company concludes
such a facility and repays the natural gas marketing and transmission debt, it
would have significant cash flow available for drilling and other reserve and
pipeline acquisitions. The Company's management is currently negotiating the
$30,000 facility.
Although the Company anticipates that it can close the $30,000
facility, there can be no assurance that such will be the case. Various consents
and collateral liens are required and there can be no assurance such liens and
consents will be forthcoming. In addition, the Company has projected its cash
requirements through January 1997 on the assumption that no environmental costs
related to its discontinued refining segment will be incurred. There can be no
assurance, however, that such will be the case.
As explained in Item 7 to the Company's Form 10-K for the year ended
September 30, 1995, there are several circumstances that could cause
unanticipated environmental expenditures by the Company applicable to the
divested refineries and there can, accordingly, be no assurance that the cash
requirements projected by the Company will not be significantly greater than
those projected.
As noted in Note 7 to the financial statements included in Part I
hereof, the Company has engaged an investment banking firm to explore strategic
options to enhance stockholder value. Alternatives being considered include a
sale of the Company's assets, the sale of the Company or a merger, among others.
If any of these alternatives are undertaken, the Company's future operations and
cash flow would be materially different than those contemplated herein.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibit:
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 1996 CASTLE ENERGY CORPORATION
/s/ Richard E. Staedtler
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Chief Financial Officer
Chief Accounting Officer
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