United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from...............to...............
Commission file number 0-17558
ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
(Exact name of small business issuer as specified in its charter)
New Jersey 76-0251416
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 200, Three Kingwood Place
Kingwood, Texas 77339
(Address of principal executive offices)
Issuer's telephone number:
(713) 358-8401
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
Transitional Small Business Disclosure Format (Check one):
Yes No x
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
BALANCE SHEET
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JUNE 30,
ASSETS 1997
---------------------
(Unaudited)
CURRENT ASSETS:
Cash $ 5,134
Accounts receivable - oil & gas sales 7,104
---------------------
Total current assets 12,238
---------------------
OIL & GAS PROPERTIES
(Successful efforts accounting method) - Proved
mineral interests 1,374,397
Less accumulated depletion 1,360,470
---------------------
Property, net 13,927
---------------------
TOTAL $ 26,165
=====================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Payable to general partner $ 154,555
---------------------
PARTNERS' CAPITAL (DEFICIT):
Limited partners (131,369)
General partner 2,979
---------------------
Net partners' (deficit) (128,390)
---------------------
TOTAL $ 26,165
=====================
Number of $500 Limited Partner units outstanding 3,097
See accompanying notes to financial statements.
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ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
(UNAUDITED) QUARTER ENDED SIX MONTHS ENDED
------------------------------ ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------- ------------- ------------ -----------
REVENUES:
Oil and gas sales $ 6,402 $ 4,671 $ 12,829 $ 12,510
------------- ------------- ------------ -----------
EXPENSES:
Depletion 1,512 3,385 2,883 4,843
Impairment of property - - - 286,322
Production and other taxes 39 155 53 297
General and administrative 2,962 3,104 5,657 7,120
------------- ------------- ------------ -----------
Total expenses 4,513 6,644 8,593 298,582
------------- ------------- ------------ -----------
NET INCOME (LOSS) $ 1,889 $ (1,973) $ 4,236 $ (286,072)
============= ============= ============ ===========
See accompanying notes to financial statements.
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ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------
PER $500
LIMITED
PARTNER
GENERAL LIMITED UNIT OUT-
TOTAL PARTNER PARTNERS STANDING
-------------- -------------- -------------- ---------
BALANCE, JANUARY 1, 1996 $ 151,538 $ 1,432 $ 150,106 48
NET INCOME (LOSS) (284,164) 834 (284,998) (92)
-------------- -------------- -------------- ---------
BALANCE, DECEMBER 31, 1996 (132,626) 2,266 (134,892) (44)
NET INCOME 4,236 713 3,523 1
-------------- -------------- -------------- ---------
BALANCE, JUNE 30, 1997 $ (128,390) $ 2,979 $ (131,369)(1) (42)
============== ============== ============== =========
(1) Includes 202 units purchased by the general partner as a limited partner.
See accompanying notes to financial statements.
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I-3
ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(UNAUDITED)
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1997 1996
----------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,236 $ (286,072)
----------- ---------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depletion 2,883 4,843
Impairment of property - 286,322
(Increase) decrease in:
Accounts receivable - oil & gas sales (821) 2,301
(Decrease) in:
Accounts payable (2,140) (1,530)
Payable to general partner (1,315) (3,571)
----------- ---------------
Total adjustments (1,393) 288,365
----------- ---------------
NET INCREASE IN CASH 2,843 2,293
CASH AT BEGINNING OF YEAR 2,291 878
----------- ---------------
CASH AT END OF PERIOD $ 5,134 $ 3,171
=========== ===============
See accompanying notes to financial statements.
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I-4
ENEX 88-89 INCOME AND RETIREMENT FUND - SERIES 2, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. The interim financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods.
2. The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," which requires certain assets to be reviewed for
impairment whenever events or circumstances indicate the carrying
amount may not be recoverable. Prior to this pronouncement, the
Company assessed properties on an aggregate basis. Upon adoption of
SFAS 121, the Company began assessing properties on an individual
basis, wherein total capitalized costs may not exceed the property's
fair market value. The fair market value of each property was
determined by H. J. Gruy and Associates, ("Gruy"). To determine the
fair market value, Gruy estimated each property's oil and gas
reserves, applied certain assumptions regarding price and cost
escalations, applied a 10% discount factor for time and certain
discount factors for risk, location, type of ownership interest,
category of reserves, operational characteristics, and other factors.
In the first quarter of 1996, the Company recognized a non-cash
impairment provision of $286,322 for certain oil and gas properties
primarily due to downward reserve revisions on the Lake Decade
acquisition. The Lake Decade acquisition included significant reserves
that were considered "proved" but not yet developed. Proved
undeveloped reserves were assigned to these leases based on offset
production in existing wells and on geologic mapping of the existing
wells north of the producing wells. Enex and its affiliated entities
owned less than 10% of this acquisition. The other working interest
owners which held the remaining interest in the acquisition, including
the operator of the field, also carried these reserves as "proved
undeveloped" reserves prior to 1996. Wells drilled near the
acquisition in an attempt to increase production from the field were
dry holes. Revised geologic mapping, based on production from existing
wells and the unsuccessful wells drilled offsetting the property,
indicated a much smaller productive area than had been originally
calculated. It was determined by the operator of the acquisition that
future drilling could not be justified. The well which was holding the
lease, which had undeveloped reserves assigned to it, was recompleted
by the operator in 1996 to a zone in which the Company did not own an
interest. As a result, the lease expired and the undeveloped reserves
associated with the lease had to be written off. This was the cause of
both the downward reserve revisions in 1996 and the reserve valuation
write downs taken by the Company in the first quarter of 1996.
3. On April 24, 1997, the Company's General Partner submitted preliminary
proxy material to the Securities Exchange Commission with respect to a
proposed liquidation of the Company.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
Second Quarter 1997 Compared to Second Quarter 1996
Oil and gas sales for the second quarter increased from $4,671 in 1996 to $6,402
in 1997. This represents an increase of $1,731 (37%). Oil sales increased by
$1,505 or 53%. A 21% increase in of production increased sales by $588. A 27%
increase in the average net oil sales price increased sales by an additional
$917. Gas sales increased by $225 or 12%. A 47% increase in the average net gas
sales price increased sales by $652. This increase was partially offset by a 24%
decrease in gas production. The increase in oil production were due to
successful workovers performed on the El Mac acquisition in 1996. The decrease
in gas production was primarily due to natural production declines, which were
especially pronounced on the Lake Decade acquisition. The increases in average
net prices were primarily the result of lower expenses incurred on the Company's
net profit interests, including on the El Mac acquisition which incurred
workover charges in the second quarter of 1996.
Depletion expense decreased from $3,385 in the second quarter of 1996 to $1,512
in the second quarter of 1997. This represents a decrease of $1,873 (55%). The
changes in production, noted above reduced depletion expense by $164. A 53%
decrease in the depletion rate decreased depletion expense by an additional
$1,709. The decrease in the depletion rate was primarily due to relatively
higher production from the El Mac and Bagley acquisitions which have relatively
lower depletion rates, partially offset by downward revisions of the oil and gas
reserves during December 1996.
General and administrative expenses decreased from $3,104 in 1996 to $2,962 in
1997. This represents a decrease of $142 or 5%. This decrease was primarily a
result of less staff time being required to manage the Company's operations.
First Six Months in 1997 Compared to First Six Months in 1996
Oil and gas sales for the first six months increased from $12,510 in 1996 to
$12,829 in 1997. This represents an increase of $319 (3%). Oil sales increased
by $593 or 8%. A 27% increase in the average net oil sales price increased sales
by $1,744. This increase was partially offset by a 15% decrease in oil
production. Gas sales decreased by $275 or 6%. A 5% decrease in gas production
reduced sales by $222. A 1% decrease in the average net gas sales price reduced
sales by an additional $53. The decreases in oil and gas production were
primarily due to natural production declines. The increase in average net oil
sales price corresponds with higher prices in the overall market for the sale of
oil. The decrease in average net gas price was primarily due to relatively
higher operating expenses on the Lake Decade acquisition from which the Company
receives a net profits royalty in the first quarter of 1997.
Depletion expense decreased from $4,843 in the first six months of 1996 to
$2,883 in the first six months of 1995. This represents a decrease of $1,960
(40%). The declines in production, noted above, reduced depletion expense by
$235. A 37% decrease in the depletion rate decreased
I-5
depletion expense by an additional $1,725. The decrease in the depletion rate
was primarily due to relatively higher production from the El Mac and Bagley
acquisitions which have relatively lower depletion rates, partially offset by
downward revisions of the oil and gas reserves during December 1996.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
certain assets to be reviewed for impairment whenever events or circumstances
indicate the carrying amount may not be recoverable. Prior to this
pronouncement, the Company assessed properties on an aggregate basis. Upon
adoption of SFAS 121, the Company began assessing properties on an individual
basis, wherein total capitalized costs may not exceed the property's fair market
value. The fair market value of each property was determined by H. J. Gruy and
Associates, ("Gruy"). To determine the fair market value, Gruy estimated each
property's oil and gas reserves, applied certain assumptions regarding price and
cost escalations, applied a 10% discount factor for time and certain discount
factors for risk, location, type of ownership interest, category of reserves,
operational characteristics, and other factors. In the first quarter of 1996,
the Company recognized a non-cash impairment provision of $286,322 for certain
oil and gas properties primarily due to downward reserve revisions on the Lake
Decade acquisition. The Lake Decade acquisition included significant reserves
that were considered "proved" but not yet developed. Proved undeveloped reserves
were assigned to these leases based on offset production in existing wells and
on geologic mapping of the existing wells north of the producing wells. Enex and
its affiliated entities owned less than 10% of this acquisition. The other
working interest owners which held the remaining interest in the acquisition,
including the operator of the field, also carried these reserves as "proved
undeveloped" reserves prior to 1996. Wells drilled near the acquisition in an
attempt to increase production from the field were dry holes. Revised geologic
mapping, based on production from existing wells and the unsuccessful wells
drilled offsetting the property, indicated a much smaller productive area than
had been originally calculated. It was determined by the operator of the
acquisition that future drilling could not be justified. The well which was
holding the lease, which had undeveloped reserves assigned to it, was
recompleted by the operator in 1996 to a zone in which the Company did not own
an interest. As a result, the lease expired and the undeveloped reserves
associated with the lease had to be written off. This was the cause of both the
downward reserve revisions in 1996 and the reserve valuation write downs taken
by the Company in the first quarter of 1996.
General and administrative expenses decreased from $7,120 in 1996 to $5,657 in
1997. This decrease of $1,463 (21%) is primarily due to less staff time being
required to manage the Company's operations.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash flow from operations is a direct result of the amount of net
proceeds realized from the sale of oil and gas production. Accordingly, the
changes in cash flow from 1996 to 1997 are primarily due to the changes in oil
and gas sales described above. It is the general partner's
I-6
intention to distribute substantially all of the Company's available cash flow
to the Company's partners.
The Company will continue to recover its reserves and distribute to the limited
partners the net proceeds realized from the sale of oil and gas production after
payment of its debt obligations. Distribution amounts are subject to change if
net revenues are greater or less than expected. Based upon current projected
cash flows from the properties, it does not appear that the Company will have
sufficient cash to pay its operating expenses, repay its debt obligations and
pay distributions.
On April 24, 1997, the Company's General Partner submitted preliminary proxy
material to the Securities Exchange Commission with respect to a proposed
liquidation of the Company.
I-7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) There are no exhibits to this report.
(b) The Company filed no reports on Form 8-K during the
quarter ended June 30, 1997.
II-1
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ENEX 88-89 INCOME AND RETIREMENT
FUND - SERIES 2, L.P.
(Registrant)
By: ENEX RESOURCES CORPORATION
General Partner
By: /s/ R. E. Densford
R. E. Densford
Vice President, Secretary
Treasurer and Chief Financial
Officer
August 11, 1997 By: /s/ James A. Klein
-------------------
James A. Klein
Controller and Chief
Accounting Officer