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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1994 Commission File Number 1-7836
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SAGE ENERGY COMPANY
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DELAWARE 75-1542170
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(State or other jurisdiction of (I.R.S. Employer Indentification
incorporation or organization) Number)
10101 Reunion Place, Suite 800, San Antonio, Texas 78216-4158
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code (210) 340-2288
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Indicate by checkmark 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
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1399 shares of $.01 par value common stock were outstanding at February 14,
1995.
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SAGE ENERGY COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Balance Sheets -
December 31, 1994 (Unaudited)
and June 30, 1993 (Audited) 1-2
Statements of Income and
Retained Earnings - Six Months and
three months ended December 31, 1994
and 1993 (Unaudited) 3-4
Statements of Cash Flow - Six months
ended December 31, 1994 and 1993
(Unaudited) 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-11
PART II OTHER INFORMATION
Item 4. Submission of Matters to a vote of
Security Holders 12
Signatures 13
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SAGE ENERGY COMPANY
10101 Reunion Place, Suite 800
San Antonio, Texas 78216-4158
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QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FORM 10-Q
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PART I
FINANCIAL INFORMATION
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SAGE ENERGY COMPANY
Balance Sheets
(In Thousands, Except Share Data)
December 31, June 30,
1994 1994
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 6,750 $ 5,192
Accounts receivable:
Trade 2,144 1,788
Oil and gas sales 4,339 5,602
Federal income tax receivable 1,357 13
Inventories - well and production
equipment, at cost 1,333 1,197
Prepaid expenses 209 63
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Total current assets 16,132 13,855
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Property, plant and equipment, at cost:
Producing oil and gas properties
(successful efforts method) 117,874 116,740
Undeveloped properties 3,821 2,515
Drilling equipment (net of valuation
allowance) 16,281 17,378
Other 4,417 4,395
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142,393 141,028
Less accumulated depreciation and
depletion (112,114) (111,714)
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30,279 29,314
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Other assets, at cost, net of accumulated
amortization 301 317
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$ 46,712 $ 43,486
============= =============
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
Balance Sheets
(In Thousands, Except Share Data)
December 31, June 30,
1994 1994
------------ ------------
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable, trade $ 3,290 $ 1,783
Accrued liabilities 5,588 4,875
State income taxes payable 192 103
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Total current liabilities 9,070 6,761
Bonds payable 18,580 18,580
Deferred income taxes 5,132 5,263
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Total liabilities 32,782 30,604
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Stockholder's equity:
Common stock, $.01 par value; authorized
12,000 shares; issued 1,399 shares - -
Additional paid-in capital 14 14
Retained earnings 13,916 12,868
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Total stockholder's equity 13,930 12,882
Contingent liabilities
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$ 46,712 $ 43,486
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The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
Statements of Income and Retained Earnings
(In Thousands, Except per Share and Share Data)
Six Months Ended Three Months Ended
December 31, December 31,
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1994 1993 1994 1993
--------- --------- --------- ---------
Revenues:
Oil and gas sales $ 13,400 $ 16,081 $ 5,713 $ 7,464
Contract drilling 818 1,043 291 561
Interest and other income 550 256 391 116
--------- --------- --------- ---------
Total revenues 14,768 17,380 6,395 8,141
--------- --------- --------- ---------
Costs and expenses:
Oil and gas operations:
Production taxes 683 673 283 298
Production costs 3,436 4,143 1,613 2,180
Nonproductive exploration
and property abandonment costs 456 1,058 295 857
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4,575 5,874 2,191 3,335
Contract drilling direct costs 622 741 300 406
Depreciation, depletion and
amortization 4,269 6,208 2,086 3,110
Geological and geophysical 655 525 177 190
General and administrative 1,846 2,469 1,300 1,735
Interest 790 916 395 451
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Total costs and expenses 12,757 16,733 6,449 9,227
--------- --------- --------- ---------
Income(loss) from operations before 2,011 647 (54) (1,086)
income taxes
Income tax expense (benefit):
Federal - current 685 - (180) (500)
State - current 89 36 (25) (42)
Deferred (131) 150 138 -
--------- --------- --------- ---------
643 186 (67) (542)
--------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting 1,368 461 13 (544)
Cumulative effect of change in accounting - 4,250 - -
--------- --------- --------- ---------
Net income (loss) 1,368 4,711 13 (544)
Retained earnings:
Beginning 12,868 7,927 14,223 13,182
Dividend (320) (320) (320) (320)
--------- --------- --------- ---------
Ending $ 13,916 $ 12,318 $ 13,916 $ 12,318
========= ========= ========= =========
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
Statements of Income and Retained Earnings
(In Thousands, Except per Share and Share Data)
Six Months Ended Three Months Ended
December 31, December 31,
-------------------------------------------
1994 1993 1994 1993
--------- --------- --------- ---------
Net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting $ 978 $ 330 $ 9 $ (389)
Cumulative effect of change in
accounting - 3,038 - -
--------- --------- --------- ---------
$ 978 $ 3,368 $ 9 $ (389)
========= ========= ========= =========
Weighted average number of shares 1,399 1,399 1,399 1,399
========= ========= ========= =========
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
Statements of Cash Flows
(In Thousands)
Six months ended
December 31,
------------------------
1994 1993
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Cash flows from operating activities:
Net income $ 1,368 $ 4,711
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Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and
amortization 4,269 6,208
Loss on disposition of assets 1 603
Deferred income taxes (131) (4,100)
Changes in current assets and
liabilities:
Accounts receivable 907 797
Federal income tax receivable (1,344) (500)
Inventories (136) 71
Prepaid expenses (146) (245)
Accounts payable 1,507 (1,124)
Accrued liabilities 713 (848)
State income taxes payable 89 39
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Total adjustments 5,729 901
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Net cash provided by
operating activities 7,097 5,612
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Cash flows from investing activities:
Proceeds from sales of assets 518 571
Capital expenditures (5,737) (6,560)
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Net cash used in investing
activities (5,219) (5,989)
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Cash flows from financing activities:
Bank debt repayments - (2,200)
Dividends (320) (320)
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Net cash used in
financing activities (320) (2,520)
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Net increase (decrease) in cash and cash equivalents 1,558 (2,897)
Cash and cash equivalents:
Beginning of period 5,192 6,123
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End of period $ 6,750 $ 3,226
========= =========
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1
In the opinion of management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
December 31, 1994, and the results of operations and cash flows for the six
months then ended. The results of operations for the six-month period and
three-month period ended December 31, 1994 are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2
Borrowings under the Credit Agreement which was amended and restated as of March
9, 1992 to form the Second Amended and Restated Credit Agreement were repaid as
of March 31, 1994. In addition, the Second Amended and Restated Credit Agreement
provides a revolving credit facility under which the Company may borrow from
time to time an amount referenced to the Company's "borrowing base," but not to
exceed $10,000,000. The borrowing base is generally determined by the value of
the Company's oil and gas properties. As of December 31, 1994, there was no
outstanding term loan and there were no borrowings outstanding with respect to
the revolving credit facility.
NOTE 3
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes,"
which requires a change from the deferred method under APB Opinion 11 to the
asset and liability method of accounting for income taxes. Under the asset and
liability method of FAS 109, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
The adoption of FAS 109 has reduced the net deferred tax liability by
approximately $4,250,000 and this amount has been reported separately as the
cumulative effect of the change in the method of accounting for income taxes in
the statement of income for the six-month period ended December 31, 1993.
Total income tax expense attributable to earnings before the cumulative effect
of change in accounting for the six-month period ended December 31, 1994 was
$643,000 of which $774,000 was attributable to current income tax expense and
$131,000 was attributable to deferred income tax benefit.
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SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 4
On March 28, 1994, the Company entered into the Commodity Floor Transaction (the
"Floor Agreement") with Chemical Bank. The Agreement commenced on April 1, 1994
and ended on December 31, 1994. The Company effectively received a price
associated with the New York Mercantile Exchange price of no lower than $13.00
per barrel with respect to 40,000 barrels of production per month. The Company
paid $72,000 for the Agreement which was amortized over the life of the
Agreement.
NOTE 5
During the quarter ended December 31, 1994, the Company sold one of its drilling
rigs for an aggregate consideration of $285,000. This sale resulted in a gain of
approximately $197,000 before income tax effect.
NOTE 6
The Company declared bonuses to four of its officers and directors of
approximately $400,000 in December 1994. Bonuses of approximately $480,000 were
paid in December 1993. The Company declared dividends of approximately $320,000
in December 1994 and 1993.
NOTE 7
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes the ultimate disposition of
these matters will have no material effect on the financial condition of the
Company.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Position
December 31, 1994 and June 30, 1994
The Company's current ratio was 1.78 to 1 at December 31, 1994 as
compared to the fiscal year ended June 30, 1994 current ratio of 2.05 to 1. Cash
on hand was $6,750,000 at December 31, 1994 and was $5,192,000 at the end of
fiscal 1994. The indebtedness under the Company's Restated Credit Agreement
("the Restated Agreement") with Texas Commerce Bank and Texas Commerce Bank -
San Antonio ("the Banks") (discussed under "Liquidity and Capital Resources"),
has been paid in full to the Banks after a payment of $1,382,703 on March 31,
1994.
During the quarter ended December 31, 1994, the Company used cash from
operations to, among other things, drill and rework wells, acquire leases and
related properties for drilling and to pay estimated Federal income taxes for
fiscal 1995. Specifically, the Company utilized approximately $3,256,000 for
capital expenditures as described below.
The Company's net fixed assets increased during the second quarter of
fiscal 1995 primarily as a result of additions to the Company's producing oil
and gas properties which resulted from drilling and recompletion work, and from
acquisitions of leases. These additions amounted to approximately $4,026,000
(See discussion under the heading "Liquidity and Capital Resources"). This
increase was partially offset by depreciation and depletion charges of
$2,086,000. Only one of the Company's drilling rigs was active during the second
quarter of fiscal 1995.
Statement of Financial Accounting Standards No. 109 (FAS 109),
"Accounting for Income Taxes", requires a change from the deferred method under
APB Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of FAS 109, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
FAS 109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company has applied
the provisions of FAS 109 in fiscal 1994 without restating prior years'
financial statements. The adoption of FAS 109 in fiscal 1994 reduced the net
deferred tax liability by approximately $4,250,000; this amount was reported
separately as the cumulative effect of the change in the method of accounting
for income taxes in the statement of operations for the quarter ending September
30, 1993.
The Company does not provide post retirement benefits to its employees
and as a result, Statement of Accounting Standards No. 106, "Employers
Accounting for Post Retirement Benefits Other Than Pensions" and Statement of
Financial Accounting Standards No. 112, "Employer's Accounting for Post
Retirement Benefits" are not applicable to the Company and will not affect the
financial statements of the Company.
Results of Operations
Three Months Ended December 31, 1994 and December 31, 1993
The Company's oil and gas revenues were lower in the second quarter of
fiscal 1995 than the prior comparable quarter primarily as a result of lower oil
production. As compared to the prior comparable quarter, lower oil production
had a negative effect on revenue by approximately $877,000, lower gas prices
approximately $679,000, and lower gas production approximately
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$151,000. Average oil prices were somewhat higher than the prior comparable
quarter a year ago, $16.42 vs $15.21, which amounts to an approximate $372,000
offset to the above decreases. The Company sold one of its drilling rigs for
$285,000 in October 1994 reflecting a gain of $197,000 (before income tax
effect) which has been included in interest and other income.
Production costs were less than the prior comparable period primarily
due to lower production. Nonproductive exploration and property abandonment
costs decreased as compared to the same quarter a year ago due primarily to the
decreased write-offs of nonproductive and expired leases.
Interest expense decreased by approximately $56,000 as compared to the
prior comparable quarter due primarily to decreased debt. The Company repaid
$1,100,000 to the Banks on September 30, 1993 and December 31, 1993 ($2,200,000
in total) with a final payment on March 31, 1994 of $1,382,703, thereby
eliminating the Company's bank debt at the present time. The Company also
reacquired and cancelled $1,234,000 in principal amount of Debentures in fiscal
1994. The Company may incur additional indebtedness under its revolving line of
credit described below.
The Company will incur additional interest expense related to its
outstanding indebtedness presently comprised of its outstanding 8 1/2%
subordinated debentures. Should the Company incur additional bank indebtedness
to finance its exploration, development, and possible property acquisition
activities, interest expense will further increase during the periods in which
such indebtedness is incurred and outstanding.
Expenses related to depreciation, depletion, and amortization costs
decreased from the prior comparable quarter as a result of, among other things,
lower production and a lower depletable base along with increased reserves.
On December 6, 1994 the Company declared a cash dividend of $320,000 or
$228.73 per share to its sole shareholder. The Company's sole shareholder is
owned and controlled by Michael Amini, Rex Amini, Ronald Amini, and Jesse Minor.
The same period a year ago also reflected a dividend of $320,000.
The Company completed seven (7) new producing wells as operator in the
second quarter of fiscal 1995 and reentered, recompleted, reworked or
participated in a number of others. Nearly all of the Company's revenues and
cash derived from operations came from oil and gas sales. The Company's
profitability depends in large part on its ability to find or purchase and
efficiently produce oil and gas reserves. In addition, profitability is heavily
affected by oil and gas prices.
Result of Operations
Six Months Ended December 31, 1994 and December 31, 1993
A comparison of the Company's operations from the six-month periods
ended December 31, 1994 and December 31, 1993 can generally be made on the same
basis as the comparison of the three-month periods discussed above. The reasons
for the operating income (loss) and the factors affecting profitability are
generally the same, except for the following additional factor.
In September 1993, the cumulative effect of change in accounting
principle of $4,250,000 relating to the adoption of FAS 109 was reported. No
such item occurred in the current six-month period. (See prior discussion under
"Financial Position").
Liquidity and Capital Resources
The Company's long-term debt at December 31, 1994 consists of its
convertible debenture issue, which bears interest at 8-1/2%, is due in 2005 (the
"Debentures") and presently has an outstanding balance of $18,580,000. To date,
the Company has reacquired $11,420,000 face amount of Debentures.
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Therefore, no sinking fund payments are currently required under the Debentures.
The Debentures are convertible into cash at the rate of $260 per every $1,000 in
principal amount of debentures.
The term facility provided under the Restated Credit Agreement has been
fully repaid. The Restated Credit Agreement also provides a revolving credit
facility pursuant to which the Company may borrow from time to time an amount
determined by reference to the Company's "borrowing base" but in any event not
more that $10,000,000. The borrowing base is generally determined by reference
to the value of the Company's oil and gas properties; however, by agreement the
Company's borrowing base was fixed at $500,000 as of September 30, 1994. On June
30, 1995 (subject to acceleration for certain events), any outstanding balance
under the Restated Credit Agreement is scheduled to be fully paid. However, such
repayment may be accelerated by the Company based on availability of cash, other
appropriate uses of cash, and other factors in its discretion. There is
presently no balance outstanding under the revolving credit facility.
Liquidity is heavily affected by oil and gas prices. Oil prices
generally evidenced substantial declines during the prior fiscal year.
Additionally, natural gas prices are at low levels. The Company cannot predict
with accuracy the volatility or parameters of future oil or gas prices. Further,
should the value of the Company's assets decrease (as a result of declines in
oil and gas prices or other factors), any future bank borrowings may be subject
to mandatory prepayment.
For approximately the last three fiscal years, the Company has
aggressively pursued exploration and development activities (particularly
horizontal drilling activities) and incurred expenditures attendant thereto. At
the time such expanded activities are undertaken, they may result in a
short-term negative impact on capital resources and liquidity. In part as a
result of such activities, the Company entered into the Restated Credit
Agreement described above and in the past borrowed funds under the revolving
credit facility. Although such funds have since been repaid, the Company
anticipates that additional amounts may be borrowed under the revolving credit
facility for drilling or producing property acquisitions at a later date.
Revenues can be expected to decline due to the decrease in prices as
well as from a decrease in production resulting from decreased drilling
activities and the natural decline in the Austin Chalk Trend area where a
majority of the Company's horizontal drilling takes place. Wells in the Austin
Chalk Trend area have traditionally exhibited significant initial production
followed by a more rapid decline than other areas. In addition, reservoir
characteristics make extrapolating future production and revenues from wells in
this area difficult. Production costs may also decline as a result of decreased
production.
The Company's sales of the "Big Lake" and "Harper Field" properties in
fiscal year 1993 resulted in the Company having fewer properties with relatively
longer life reserves. Although management of the Company deems it important to
acquire additional properties with longer life reserves at suitable prices, the
Company will also consider further sales of properties. Proceeds from any such
sales could be used for a variety of purposes, including property acquisitions
and acquisitions of outstanding Debentures. In addition, the Company recently
announced that it may utilize up to $2,000,000 to repurchase some of its
outstanding Debentures in the open market or in privately negotiated
transactions. There is no assurance that the Company will repurchase any of its
Debentures.
The Company intends to continue on a modified basis its exploration and
development activities in the Austin Chalk and in other areas. Such activity
will in large part be based upon availability of capital and economic prospects
and with consideration for continued volatility in oil and gas prices. The
Company will also continue to seek undeveloped leasehold acreage and to consider
various proposals for the acquisition of producing properties within such
parameters. Further, the Company will expend funds to implement
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various enhanced recovery techniques within such parameters and continue its
horizontal drilling activities with industry partners and on its own. The
Company has also begun to pursue exploration opportunities which it has
identified through the use of computer technology and 3-D seismic. Specifically,
the Company has undertaken significant exploration activities in North Dakota.
The Company anticipates that its increased exploration activities will continue
to have a negative impact on its liquidity. The Company anticipates utilizing
internally generated funds and, if necessary and available, funds under the
Restated Credit Agreement to continue such activities.
The Company is required to make estimated payments of Federal income
taxes for the fiscal year ending June 30, 1995 and has paid $2,005,000 for the
first two quarters of fiscal 1995.
In December 1994, the Company determined to pay bonuses to four of its
officers and directors aggregating $400,000.
On December 6, 1994 the Company declared a cash dividend to its sole
shareholder of $228.73 per share (or an aggregate of $320,000). The Company's
sole shareholder is owned by and controlled by Michael Amini, Rex Amini, Ronald
Amini, and Jesse Minor. The Company may consider the payment of cash dividends
(in accordance with applicable law and the provisions of the Restated Credit
Agreement as the same may be modified or amended from time to time) in the
future. The payment of such dividends will be determined by the Company as
general business conditions, the development of the Company's business, the
financial condition of the Company, and other factors may warrant. Any such
payment of dividends would adversely affect capital resources and liquidity.
In addition, the Company elected not to make a sinking fund payment
(which would ordinarily have been due at least one business day before October
15, 1994) for the purpose of setting aside funds to retire its outstanding
Debentures. The Company is not required to make such payment, which would
ordinarily be a sum in cash sufficient to retire by redemption $1,500,000
principal amount of the Debentures, because it reacquired and cancelled a
sufficient number of Debentures to eliminate the sinking fund payment required
on such date. The Company has reacquired and cancelled Debentures in the face
amount of $11,420,000, which could, if the Company so elects, result in the
deferral of sinking fund payments until 1997. The Company reacquired and
cancelled an aggregate of $1,234,000 in principal amount of Debentures in fiscal
1994 for an aggregate purchase price of $999,540 which resulted in an
extraordinary gain of approximately $141,000, net of tax effect. The reacquired
Debentures were cancelled.
Effective March 28, 1994, the Company entered into the Commodity Floor
Transaction (the "Floor Agreement") with Chemical Bank which terminated on
December 31, 1994. The Company paid $72,000 to Chemical Bank for the Floor
Agreement in March of 1994 but did not receive any payments thereunder.
The Company maintains an internal compliance program to monitor its
compliance with environmental laws and employs an independent consulting firm to
inspect its wellsites to determine whether the Company has any clean-up
obligations.
Although certain of the transactions described herein may have adversely
affected liquidity and capital resources, management of the Company currently
believes that (based on present pricing scenarios) its liquidity and capital
resources are generally adequate. However, as a result of the exploration and
development activities and the possible acquisition of properties with long-life
reserves, it is possible that the Company will utilize additional borrowings
under the revolving credit facility to finance its activities.
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PART II
OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
Pursuant to a unanimous written consent of the sole stockholder of Sage
Energy Company dated December 6, 1994, Jesse Minor, Rex Amini, Michael
Amini, Ronald Amini, Mark S. Solomon, and Harold Conrad were re-elected
as members of the Board of Directors of Sage Energy Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has only caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sage Energy Company
-------------------
(Registrant)
Date: February 14, 1995 By: /s/ Jesse Minor
-----------------------------
Jesse Minor
President
Date: February 14, 1995 By: /s/ Stanley A. Paris, Jr
-----------------------------
Stanley A. Paris, Jr.
Vice President-Finance
Principal Accounting Officer
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