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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 March 31, 1996 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 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 May 15, 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 -
March 31,1996 (Unaudited)
and June 30, 1995 1-2
Statements of Income and
Retained Earnings - Nine months and
three months ended March 31,1996
and 1995 (Unaudited) 3
Statements of Cash Flow - Nine months
ended March 31,1996 and 1995
(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 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)
March 31, June 30,
1996 1995
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Assets
Current assets:
Cash and cash equivalents $ 5,392 $ 3,104
Accounts receivable:
Trade 5,315 1,827
Oil and gas sales 6,363 4,156
Federal income tax receivable - 712
Inventories - well and production
equipment, at cost 1,334 1,483
Prepaid expenses 196 258
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Total current assets 18,600 11,540
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Property, plant and equipment, at cost:
Producing oil and gas properties
(successful efforts method) 119,316 118,504
Undeveloped properties 4,290 4,044
Drilling equipment 7,436 9,673
Other 4,281 4,350
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135,323 136,571
Less accumulated depreciation and
depletion (105,356) (106,605)
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29,967 29,966
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Other assets, at cost, net of accumulated
amortization 255 285
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$ 48,822 $ 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)
March 31, June 30,
1996 1995
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Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable, trade $ 1,897 $ 1,423
Accrued liabilities 6,246 3,665
Federal income taxes payable 517 -
State income taxes payable 359 197
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Total current liabilities 9,019 5,285
Bonds payable 18,030 18,530
Deferred income taxes 4,386 4,166
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Total liabilities 31,435 27,981
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Stockholder's equity:
Common stock, $.01 par value; authorized
12,000 shares; issued 1,399 shares - -
Additional paid-in capital 14 14
Retained earnings 17,373 13,796
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Total stockholder's equity 17,387 13,810
Contingent liabilities
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$ 48,822 $ 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)
Nine Months Ended Three Months Ended
March 31, March 31,
-------------------------------------------
1996 1995 1996 1995
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Revenues:
Oil and gas sales $ 19,277 $ 19,271 $ 7,366 $ 5,871
Contract drilling 1,406 1,340 419 522
Interest and other income 1,151 1,541 628 991
--------- --------- --------- ---------
Total revenues 21,834 22,152 8,413 7,384
--------- --------- --------- ---------
Costs and expenses:
Oil and gas operations:
Production taxes 936 977 357 294
Production costs 5,343 4,995 1,715 1,559
Nonproductive exploration
and property abandonment costs 378 1,684 87 1,228
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6,657 7,656 2,159 3,081
Contract drilling direct costs 1,091 1,038 328 416
Depreciation, depletion and
amortization 5,169 6,218 1,837 1,949
Geological and geophysical 209 1,206 79 551
General and administrative 2,417 2,483 615 637
Interest 1,164 1,184 384 394
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Total costs and expenses 16,707 19,785 5,402 7,028
--------- --------- --------- ---------
Income from operations before income taxes 5,127 2,367 3,011 356
Income tax expense (benefit):
Federal - current 1,269 1,798 1,017 1,113
State - current 102 238 70 149
Deferred 220 (1,201) (157) (1,070)
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1,591 835 930 192
--------- --------- --------- ---------
Income before extraordinary item 3,536 1,532 2,081 164
Extraordinary item - debenture retirement
(net of income taxes of $19) 41 - - -
--------- --------- --------- ---------
Net income 3,577 1,532 2,081 164
Retained earnings:
Beginning 13,796 12,868 15,292 13,916
Dividend - (320) - -
--------- --------- --------- ---------
Ending $ 17,373 $ 14,080 $ 17,373 $ 14,080
========= ========= ========= =========
Income per common share before
extraordinary item $ 2,528 $ 1,095 $ 1,487 $ 117
Extraordinary item 29 - - -
--------- --------- --------- ---------
Net income per common share $ 2,557 $ 1,095 $ 1,487 $ 117
========= ========= ========= =========
Weighted average number of shares 1,399 1,399 1,399 1,399
========= ========= ========= =========
The accommpanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
Statements of Cash Flows
(In Thousands)
Nine months ended
March 31,
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1996 1995
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Cash flows from operating activities:
Net income $ 3,577 $ 1,532
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Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item before income taxes 60 -
Depreciation, depletion and
amortization 5,169 6,218
Loss (gain) on disposition of assets (1,069) 211
Deferred income taxes 220 (1,201)
Changes in current assets and
liabilities:
Accounts receivable (5,695) 996
Federal income tax receivable 712 (231)
Inventories 149 (236)
Prepaid expenses 62 (93)
Accounts payable 474 (660)
Accrued liabilities 2,581 117
Federal income taxes payable 517 -
State income taxes payable 162 238
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Total adjustments 3,342 5,359
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Net cash provided by
operating activities 6,919 6,891
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Cash flows from investing activities:
Proceeds from sales of assets 3,125 2,153
Capital expenditures (7,256) (7,488)
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Net cash used in investing
activities (4,131) (5,335)
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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 2,288 1,236
Cash and cash equivalents:
Beginning of period 3,104 5,192
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End of period $ 5,392 $ 6,428
======== ========
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
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
March 31,1996, and the results of operations and cash flows for the nine months
then ended. The results of operations for the nine- month period and
three-month period ended March 31,1996 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
Related party accounts receivable at the quarter ended March 31, 1996 were
approximately $2,100,000. These receivables are unsecured and arise from
normal operations of oil and gas properties.
NOTE 4
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 March 31, 1996 and 1995, there was no
outstanding term loan and there were no borrowings outstanding with respect to
the revolving credit facility.
NOTE 5
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.
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NOTE 6
During the nine-month period ended March 31, 1996, 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.
NOTE 7
During the nine-month period ended March 31, 1995, the Company sold nine of its
drilling rigs for an aggregate consideration of approximately $1,760,000. This
sale resulted in a gain of approximately $1,059,000 before income tax effect.
During the quarter ended March 31, 1996, the Company sold three of its drilling
rigs for an aggregate consideration of approximately $610,000. This sale
resulted in a gain of approximately $447,000 before income tax effect.
NOTE 8
During the nine-month period ended March 31, 1996, 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 9
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 10
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.
NOTE 11
Subsequent to March 31, 1996, the Company sold all of its servicing units and
related equipment and automobiles. This sale will result in a gain of
approximately $690,000 before income tax effect.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Financial Position
March 31,1996 and June 30,1995
The Company's current ratio was 2.06 to 1 at March 31,1996 as compared
to the June 30, 1995 current ratio of 2.18 to 1. Cash on hand at March 31,1996
was $5,392,000 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 March 31,1996, 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 $2,069,000 for capital expenditures as described below.
Trade receivables increased by approximately $3,488,000 primarily as a
result of the receivables resulting from the sale of rigs in March of 1996 (as
discussed in Results of Operations below) and increased receivables from four of
the Company's Officers and Directors of approximately $1,590,000 attributable to
their participation in certain wells drilled by the Company.
The Company's net fixed assets increased slightly during the third
quarter of fiscal 1996 primarily as a result of additions of approximately
$2,036,000 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 basically offset by depletion and depreciation charges of $1,837,000,
disposition of three (3) drilling rigs with an approximate net book value of
$163,000 and by write-offs of plugged and abandoned properties, non-productive
properties and expired leases of approximately $87,000. Only one of the
Company's drilling rigs was active during the third 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
results of operations at the time in which it is adopted.
Results of Operations
Three Months Ended March 31, 1996 and March 31, 1995
The Company's oil and gas revenues were higher in the third quarter of
fiscal 1996 than the prior comparable quarter a year ago primarily as a result
of higher oil and gas prices. Oil and gas prices averaged $18.86 per barrel
and $2.16 per MCF in the current quarter versus $17.36 per barrel and $1.54 per
MCF in the comparable quarter a year ago.
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The Company sold three of its drilling rigs at auction in March 1996
for a net consideration of approximately $610,000. Such sale produced a gain
before taxes of approximately $447,000. During the comparable quarter a year
ago, the Company sold eight of its drilling rigs for approximately $1,475,000
generating a gain before taxes of approximately $862,000. The Company now owns
four (4) rigs and has no current plans for future rig sales. Non productive
exploration and property abandonment costs decreased due to decreased dry hole
costs and plugged and abandoned wells.
Interest expense at March 31, 1996 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.
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.
The Company completed four (4) new producing wells as operator in the
third 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.
Results of Operations
Nine Months Ended March 31, 1996 and March 31, 1995
A comparison of the Company's operations for the nine-month periods
ended March 31, 1996 and March 31, 1995 can generally be made on the same basis
as the comparison of the three-month periods discussed above. The reasons for
the operating income and the factors affecting profitability are generally the
same except that expenses related to depreciation, depletion, and amortization
costs decreased from the prior comparable nine-month period a year ago
primarily as a result of lower production and a lower depletable base along
with increased reserves.
Liquidity and Capital Resources
The Company's long-term debt at March 31,1996, 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 calendar year 1997. The
Debentures are convertible into cash at the rate of $260 per every $1,000 in
principal amount of Debentures.
Under the Company's Restated Credit Agreement with Texas Commerce
Bank, as amended, Company may borrow up to $3,000,000 under the revolving
credit facility until June 30, 1997 (the "Termination Date"). 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
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cash or other appropriate uses of cash, and other factors in its discretion.
As of March 31, 1996, the Company had not drawn funds under the revolving
credit facility.
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 sales of properties and other assets 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.
The Company also recently announced the cancellation 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"). Debentures with an aggregate
principal amount of $500,000 were repurchased under the Program.
In March 1996 the Company sold at auction three of its drilling rigs
for approximately $610,000. In May 1996, the Company sold its six well
servicing units and related vehicles. The Company will now contract out all of
its well service needs.
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
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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 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 March 31, 1996, 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. 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 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: May 15, 1996 By: /s/ Jesse Minor
---------------------------------
Jesse Minor
President
Date: May 15, 1996 By: /s/ Stanley A. Paris, Jr.
---------------------------------
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 Nine months Ended
March 31, 1996. (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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