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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, 1995 Commission File Number 1-7836
SAGE ENERGY COMPANY
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DELAWARE 75-1542170
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(State or other jurisdiction of (I.R.S. Employer Identification
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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1,399 shares of $.01 par value common stock were outstanding at February 14,
1996.
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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, 1995 (Unaudited)
and June 30, 1995 1-2
Statements of Income and
Retained Earnings - Six months and
three months ended December 31, 1995
and 1994 (Unaudited) 3
Statements of Cash Flow - Six months
ended December 31, 1995 and 1994
(Unaudited) 4
Notes to Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-11
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 12
HOLDERS
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 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,
1995 1995
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Assets
Current assets:
Cash and cash equivalents $ 4,660 $ 3,104
Accounts receivable:
Trade 3,649 1,827
Oil and gas sales 4,817 4,156
Federal income tax receivable 445 712
Inventories - well and production
equipment, at cost 1,124 1,483
Prepaid expenses 220 258
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Total current assets 14,915 11,540
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Property, plant and equipment, at cost:
Producing oil and gas properties
(successful efforts method) 117,678 118,504
Undeveloped properties 4,463 4,044
Drilling equipment 9,722 9,673
Other 4,278 4,350
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136,141 136,571
Less accumulated depreciation and
depletion (105,707) (106,605)
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30,434 29,966
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Other assets, at cost, net of accumulated
amortization 263 285
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$ 45,612 $ 41,791
========== ==========
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,
1995 1995
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Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable, trade $ 2,585 $ 1,423
Accrued liabilities 4,916 3,665
State income taxes payable 232 197
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Total current liabilities 7,733 5,285
Bonds payable 18,030 18,530
Deferred income taxes 4,543 4,166
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Total liabilities 30,306 27,981
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Stockholder's equity:
Common stock, $.01 par value; authorized
12,000 shares; issued 1,399 shares - -
Additional paid-in capital 14 14
Retained earnings 15,292 13,796
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Total stockholder's equity 15,306 13,810
Contingent liabilities
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$ 45,612 $ 41,791
========== ==========
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 End
December 31, December 31,
-------------------- --------------------
1995 1994 1995 1994
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Revenues:
Oil and gas sales $ 11,911 $ 13,400 $ 6,117 $ 5,713
Contract drilling 987 818 618 291
Interest and other income 523 550 136 391
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Total revenues 13,421 14,768 6,871 6,395
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Costs and expenses:
Oil and gas operations:
Production taxes 579 683 292 283
Production costs 3,628 3,436 1,742 1,613
Nonproductive exploration
and property abandonment costs 291 456 68 295
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4,498 4,575 2,102 2,191
Contract drilling direct costs 763 622 512 300
Depreciation, depletion and
amortization 3,332 4,269 1,592 2,086
Geological and geophysical 130 655 90 177
General and administrative 1,802 1,846 1,248 1,300
Interest 780 790 386 395
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Total costs and expenses 11,305 12,757 5,930 6,449
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Income (loss) from operations before
income taxes 2,116 2,011 941 (54)
Income tax expense (benefit):
Federal - current 252 685 (13) (180)
State - current 32 89 17 (25)
Deferred 377 (131) 296 138
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661 643 300 (67)
--------- --------- --------- ---------
Income before extraordinary item 1,455 1,368 641 13
Extraordinary item - debenture retirement
(net of income taxes of $19) 41 - 41 -
--------- --------- --------- ---------
Net income 1,496 1,368 682 13
Retained earnings:
Beginning 13,796 12,868 14,610 14,223
Dividend - (320) - (320)
--------- --------- --------- ---------
Ending $ 15,292 $ 13,916 $ 15,292 $ 13,916
--------- --------- --------- ---------
Income per common share before
extraordinary item $ 1,040 $ 978 $ 458 $ 9
Extraordinary item 29 - 29 -
--------- --------- --------- ---------
Net income per common share $ 1,069 $ 978 $ 487 $ 9
========= ========= ========= =========
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,
--------------------------
1995 1994
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Cash flows from operating activities:
Net income $ 1,496 $ 1,368
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Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item before income taxes 59 -
Depreciation, depletion and
amortization 3,332 4,269
Loss (gain) on disposition of assets (651) 1
Deferred income taxes 377 (131)
Changes in current assets and
liabilities:
Accounts receivable (2,483) 907
Federal income tax receivable 267 (1,344)
Inventories 359 (136)
Prepaid expenses 38 (146)
Accounts payable 1,162 1,507
Accrued liabilities 1,251 713
State income taxes payable 35 89
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Total adjustments 3,746 5,729
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Net cash provided by
operating activities 5,242 7,097
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Cash flows from investing activities:
Proceeds from sales of assets 2,001 518
Capital expenditures (5,187) (5,737)
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Net cash used in investing
activities (3,186) (5,219)
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Cash flows from financing activities:
Long-term debt retired (500) -
Dividends - (320)
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Net cash used in
financing activities (500) (320)
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Net increase in cash and cash equivalents 1,556 1,558
Cash and cash equivalents:
Beginning of period 3,104 5,192
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End of period $ 4,660 $ 6,750
======== ========
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
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, 1995, 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 31,1995 are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2
During March, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121,"Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to Be Disposed Of." The Company is
required to adopt Statement 121 in the fiscal year beginning July 1,1996.
Statement 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Furthermore, Statement 121 also requires
that long-lived assets and certain identifiable intangibles to be disposed of
be reported at the lower of carrying amount or fair value less cost to sell,
except for assets that are covered by APB Opinion 30. The Company has not
completed all of the complex analyses required to estimate the impact of the
new statement, however, the adoption of Statement 121 is not expected to have a
material adverse impact on the Company's financial position or the results of
its operation at the time in which it is adopted.
NOTE 3
The Second Amended and Restated Credit Agreement provides a revolving credit
facility under which the Company may borrow from time to time through June 30,
1997 an amount referenced to the Company's "borrowing base," but not to exceed
$3,000,000. The borrowing base is generally determined by the value of the
company's oil and gas properties. As of December 31, 1995, there was no
outstanding term loan and there were no borrowings outstanding with respect to
the revolving credit facility.
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 six-month period ended December 31, 1995, the Company sold all of
its producing properties in the state of Oklahoma for an aggregate
consideration of $925,000. The sale resulted in a gain of approximately
$489,000 before income taxes which has been included in interest and other
income in the accompanying statements of income.
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NOTE 6
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. During the
quarter ended December 31, 1995, the Company did not have any similar
transactions.
NOTE 7
During the quarter ended December 31, 1995, the Company reacquired $500,000 in
principal amount of debentures for an aggregate consideration of $431,250. the
related gain is shown as an extraordinary item.
NOTE 8
The Company declared bonuses to four of its officers and directors of
approximately $520,000 in December, 1995 and $400,000 in December 1994. The
Company declared dividends of approximately $320,000 in December 1994.
NOTE 9
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 adverse effect on the financial condition
of the Company.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Financial Position
December 31, 1995 and June 30, 1995
The Company's current ratio was 1.93 to 1 at December 31,
1995 as compared to the June 30, 1995 current ratio of 2.18 to 1. Cash on hand
at December 31, 1995 was $4,660,000 and $3,104,000 at June 30, 1995. There is
presently no outstanding indebtedness under the Company's Restated Credit
Agreement with Texas Commerce Bank ("the Bank") (discussed under "Liquidity and
Capital Resources").
During the quarter ended December 31, 1995, the Company
used cash from operations to, among other things, drill and rework wells and
acquire leases and related properties for drilling. Specifically, the Company
spent approximately $2,243,000 for capital expenditures as described below.
The Company's net fixed assets increased slightly 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. (See discussion under the
heading "Liquidity and Capital Resources"). This increase was partially offset
by depletion and depreciation charges of $1,592,000 and by write-offs of
plugged and abandoned properties, non productive properties and expired leases
of approximately $70,000. Only one of the Company's drilling rigs was active
during the second quarter of fiscal 1996.
In March, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt Statement 121 in the fiscal year beginning
July 1, 1996. Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Furthermore, Statement 121
also requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell, except for assets that are covered by APB Opinion 30. The Company has
not completed all of the complex analysis required to estimate the impact of
the new Statement, however, the adoption of Statement 121 is not expected to
have a material adverse impact on the Company's financial position or the
result of operations at the time in which it is adopted.
Results of Operations
Three Months Ended December 31, 1995 and December 31, 1994
The Company's oil and gas revenues were slightly higher in
the second quarter of fiscal 1996 than the prior comparable quarter primarily
as a result of higher oil and gas prices.
Interest expense at December 31, 1995 decreased slightly as
compared to the prior comparable quarter due to decreased debt. The Company
reacquired and cancelled $500,000 in principal amount of its outstanding 8
1/2% Subordinated Debentures due 2005 (the "Debentures") during the quarter
ended December 31, 1995 thus decreasing the aggregate annual interest expense
attributable to the Debentures by $42,500. However, the Company may incur
additional indebtedness under its revolving line of credit described below.
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The Company will incur ongoing interest expense related to
its outstanding indebtedness presently comprised of its outstanding 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 or a year ago
primarily as a result of lower production and a lower depletable base along
with increased reserves. Geological and geophysical costs decreased due to the
Company's decreased exploration activities and 3-D seismic activities during
the quarter.
The Company completed four (4) new producing wells as
operator in the second quarter of fiscal 1996 and re-entered, recompleted,
reworked or participated in a number of others. Substantially 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, 1995 and December 31, 1994
A comparison of the Company's operations from the six-month
periods ended December 31, 1995 and December 31, 1994 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.
The Company's oil and gas revenues were lower during the
first six months of fiscal 1996 than the prior comparable six month period
(despite higher oil prices) primarily as a result of lower oil and gas
production.
Liquidity and Capital Resources
The Company's long-term debt at December 31, 1995,
consisted of its convertible Debentures which had an aggregate outstanding
balance of $18,030,000. During the quarter ended December 31, 1995, the Company
acquired and cancelled debentures with aggregate principal of $500,000 thus
reducing its indebtedness by such amount. No sinking fund payments are
currently required under the Debentures and, absent further acquisitions by the
Company of Debentures, no sinking fund payments will be due until fiscal 1997.
The Debentures are convertible into cash at the rate of $260 per every $1,000
in principal amount of Debentures.
Effective May 9, 1995, the Company entered into an
amendment to the Restated Credit Agreement with Texas Commerce Bank (the
"Amendment"). The Amendment generally provides an extension of the Company's
ability to borrow funds under the revolving credit facility (until June 30,
1997) (the "Termination Date"). The Amendment also decreased the amount that
the Company may borrow down to $3,000,000 under the revolving credit facility.
The Amendment does not contemplate additional term loans to the Company. On
the Termination Date (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
upon availability of cash or other appropriate uses of cash, and other factors
in its discretion. As of December 31, 1995, the Company had not drawn funds
under the revolving credit facility.
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Management of the Company deems it important to acquire
additional properties with longer life reserves at suitable prices, however,
the Company also on a routine basis considers further sales of properties at
appropriate prices. The proceeds from any such sales could be used for a
variety of purposes, including property acquisitions, acquisitions of
outstanding Debentures, and repayment of bank debt, if any. In this regard,
the Company sold its Oklahoma gas properties effective August 1, 1995 for
$925,000 and certain properties in North Dakota for approximately $443,000.
The Company also recently announced the implementation of a
program to use up to $2 million to repurchase certain of its outstanding
Debentures in the open market or in privately negotiated transactions at prices
and at times deemed suitable by management, (the "Program"). The Program may
be terminated at any time by the Board of Directors. To date, Debentures with
an aggregate principal amount of $500,000 have been repurchased under the
Program. There can be no assurances that any additional purchases will be
made.
For some time 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 even if they are ultimately
successful. In part, as a result of such activities the Company entered into
the Restated Credit Agreement and in the past borrowed funds under the
revolving credit facility. Although the funds have since been repaid, the
Company anticipates that additional funds may be borrowed under the revolving
credit facility for drilling or producing property acquisitions at a later
date.
Absent additional acquisitions of producing properties,
revenues can be expected to decline due to 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. Revenue will also decline in response to
negative changes in oil and gas prices.
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 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. 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 will 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
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December 1995, the Company determined to pay bonuses to four of it's officers
and directors aggregating $520,000.
The Company elected not to make a sinking fund payment in
fiscal 1996 (which would ordinarily have been due at least one business day
before October 15, 1995) 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. As of December 31, 1995, the Company has
reacquired and cancelled Debentures in the face amount of $11,970,000, which
could, if the Company so elects, result in the deferral of sinking fund
payments until 1997. $500,000 in principal amount of Debentures was reacquired
in November 1995 for an aggregate consideration of $431,250.
Liquidity is heavily affected by oil and gas prices both of
which are presently 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.
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 other borrowings under the revolving credit facility to finance its
activities.
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. Aside from a site in California for which the
Company has reserved $200,000, the Company is not aware of any other potential
clean-up obligations which would have a material effect on its financial
condition or results of operations.
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Inflation
The rate of inflation has had no significant effect on the
Company's operations for some time.
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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 5, 1995, 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.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule
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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
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(Registrant)
Date: February 14, 1996 By: /s/ Jesse Minor
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Jesse Minor
President
Date: February 14, 1996 By: /s/ Stanley A. Paris, Jr.
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Stanley A. Paris, Jr.
Vice President-Finance
Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit
Number
27.1 Exhibit 27.1 Financial Data Schedule for Six months Ended
December 31, 1995. (Pursuant to Item 601(c)(iv) of Regulation
S-X, the Financial Data Schedule is not deemed to be "filed" for
purposes of Section 11 of the Securities Act of 1933, as amended,
or Section 18 of the Securities Exchange Act of 1934, as
amended.)
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