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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-7836
SAGE ENERGY COMPANY
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(Exact Name of Registrant as Specified in Its Chapter)
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 14, 1997.
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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
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Balance Sheets -
March 31, 1997 (Unaudited)
and June 30, 1996 1-2
Statements of Income and
Retained Earnings - Nine months and
three months ended March 31,1997
and 1996 (Unaudited) 3
Statements of Cash Flow - Nine months
ended March 31, 1997 and 1996
(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
Balance Sheets
(In Thousands, Except Share Data)
March 31, June 30,
1997 1996
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 9,798 $ 7,966
Accounts receivable:
Trade 3,028 3,561
Oil and gas sales 6,242 6,839
Inventories - well and production
equipment, at cost 1,707 1,333
Prepaid expenses 322 88
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Total current assets 21,097 19,787
--------- ---------
Property, plant and equipment, at cost:
Producing oil and gas properties
(successful efforts method) 121,829 119,550
Undeveloped properties 5,511 4,812
Drilling equipment 5,325 5,096
Other 3,045 3,038
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135,710 132,496
Less accumulated depreciation
and depletion (104,482) (102,355)
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31,228 30,141
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Other assets, at cost, net of accumulated
amortization 135 247
--------- ---------
$ 52,460 $ 50,175
========= =========
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,
1997 1996
--------- --------
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable, trade $ 3,607 $ 2,765
Accrued liabilities 7,264 6,331
Federal income taxes payable 105 555
State income taxes payable 879 435
------- -------
Total current liabilities 11,855 10,086
Bonds payable 10,698 18,030
Deferred income taxes 4,107 3,823
------- -------
Total liabilities 26,660 31,939
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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 25,786 18,222
------- -------
Total stockholder's equity 25,800 18,236
Contingent liabilities
------- -------
$52,460 $50,175
======= =======
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,
-----------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Oil and gas sales $25,679 $19,277 $8,431 $7,366
Contract drilling 899 1,406 258 419
Interest and other income 2,650 1,151 1,093 628
------- ------- ------ ------
Total revenues 29,228 21,834 9,782 8,413
------- ------- ------ ------
Costs and expenses:
Oil and gas operations:
Production taxes 1,134 936 368 357
Production costs 5,543 5,343 1,715 1,715
Nonproductive exploration
and property abandonment costs 1,076 378 27 87
------- ------- ------ ------
7,753 6,657 2,110 2,159
Contract drilling direct costs 643 1,091 205 328
Depreciation, depletion and
amortization 5,150 5,169 1,802 1,837
Geological and geophysical 237 209 50 79
General and administrative 2,946 2,417 813 615
Interest 883 1,164 227 384
------- ------- ------ ------
Total costs and expenses 17,612 16,707 5,207 5,402
------- ------- ------ ------
Income from operations before income taxes 11,616 5,127 4,575 3,011
Income tax expense (benefit):
Federal -- current 3,499 1,269 1,326 1,017
State -- current 287 102 109 70
Deferred 284 220 (373) (157)
------- ------- ------ ------
4,070 1,591 1,062 930
------- ------- ------ ------
Income before extraordinary item 7,546 3,536 3,513 2,081
Extraordinary item -- debenture retirement
(net of income taxes of $12) 18 41 -- --
------- ------- ------ ------
Net income 7,564 3,577 3,513 2,081
Retained earnings:
Beginning 18,222 13,796 22,273 15,292
------- ------- ------ ------
Ending $25,786 $17,373 $25,786 $17,373
======= ======= ======= =======
Income per common share before
extraordinary item $ 5,394 $ 2,528 $ 2,511 $ 1,487
Extraordinary item 13 29 -- 0
------- ------- ------ ------
Net income per common share $ 5,407 $ 2,557 $ 2,511 $ 1,487
======= ======= ======= =======
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)
Nine Months Ended
March 31,
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1997 1996
---- ----
Cash flows from operating activities:
Net income $7,564 $3,577
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Adjustments to reconcile net
income to net cash provided by
operating activities:
Extraordinary item before
income taxes 30 60
Depreciation, depletion and
amortization 5,150 5,169
Gain on disposition of assets (1,646) (1,069)
Deferred income taxes 284 220
Changes in current assets and
liabilities:
Accounts receivable 1,130 (5,695)
Federal income tax receivable - 712
Inventories (374) 149
Prepaid expenses (234) 62
Other assets 95 -
Accounts payable 842 474
Accrued liabilities 933 2,581
Federal income taxes payable (450) 517
State income taxes payable 444 162
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Total adjustments 6,204 3,342
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Net cash provided by
operating activities 13,768 6,919
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Cash flows from investing activities:
Proceeds from sales of assets 6,329 3,125
Capital expenditures (10,933) (7,256)
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Net cash used in
investing activities (4,604) (4,131)
-------- --------
Cash flows from financing activities:
Long-term debt retired (7,332) (500)
-------- --------
Net cash used in
financing activities (7,332) (500)
-------- --------
Net increase in cash and cash equivalents 1,832 2,288
Cash and cash equivalents:
Beginning of period 7,966 3,104
-------- -------
End of period $ 9,798 $ 5,392
======== =======
The accompanying notes are an integral part
of these financial statements.
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SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31,1997
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, 1997, 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, 1997 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." 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 adopted Statement 121 in the fiscal
year beginning July 1, 1996. However, there was no impact on the Company's
financial position or results of its operations upon adoption.
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 March 31, 1997, there was no
outstanding term loan and there were no borrowings outstanding with respect to
the revolving credit facility.
NOTE 4
During the nine-month period ended March 31, 1997, the Company redeemed
$7,332,000 of its outstanding convertible subordinated Debentures. Of the
redeemed Debentures, $7,000,000 was effected at a price equal to 100% of the
principal amount of each Debenture so redeemed.
NOTE 5
During the nine-month period ended March 31, 1997, 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. During the nine-month period ended March 31, 1997, the
Company sold all of its undeveloped prospects in North Dakota for an aggregate
consideration of approximately $3,933,000. The sales resulted in a gain of
approximately $2,544,000 before income taxes. The Company also sold some
producing properties in New Mexico for an aggregate consideration of $35,000.
The sale resulted in a loss of approximately $536,000 before income taxes. The
Company also sold several of its interests in non-operated properties for an
aggregate consideration of approximately $1,023,000. The sale resulted in a
gain of approximately $155,000 before income taxes. The net gain has been
included in interest and other income in the accompanying statements of income.
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NOTE 6
During the nine-month period ended March 31, 1996, the Company sold three of
its drilling rigs for an aggregate consideration of approximately $610,000. The
sale resulted in a gain of approximately $447,000 before income tax effect.
During the nine-month period ended March 31, 1997, the Company had no such
sales.
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 adverse effect on the financial condition
or results of operations of the Company.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Position
March 31,1997 and June 30, 1996
The Company's current ratio was 1.78 to 1 at March 31, 1997 as
compared to the June 30, 1996 current ratio of 1.96 to 1. Cash on hand at
March 31, 1997 was $9,798,000 and $7,966,000 at June 30, 1996. 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, 1997, 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 $4,617,000 for capital expenditures as described below.
The Company's net fixed assets increased during the third quarter of
fiscal 1997 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 $1,802,000, by write-offs of plugged and abandoned
properties, non productive properties, and expired leases of approximately
$20,000 and the sale of certain North Dakota properties. Only one of the
Company's drilling rigs was active during the third quarter of fiscal 1997.
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."
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 adopted
Statement 121 for the fiscal year beginning July 1, 1996. However, there was no
impact on the Company's financial position or the results of its operations
upon adoption.
Results of Operations
Three Months Ended March 31, 1997 and March 31, 1996
The Company's oil and gas revenues were higher in the third quarter of
fiscal 1997 than the prior comparable quarter a year ago as a result of higher
oil and gas prices. Average oil and gas prices were significantly higher than
the prior comparable quarter, $21.94 vs. $18.86 per barrel and $2.92 vs.$2.17
per Mcf, which amounts to an approximate revenue increase of $1,760,000.
Interest and other income increased primarily as the result of a gain on the
sale of certain North Dakota properties for $1,825,000 which generated a gain
before taxes of $822,750. The Company also sold its interests in several
non-operated properties for an aggregate consideration of approximately
$1,023,000 resulting in a gain of $155,000 before tax effect. In the same
period a year ago, the Company sold three of its drilling rigs for an aggregate
consideration of approximately $610,000 which generated a gain before taxes of
approximately $447,000. Contract drilling revenue decreased due to the sale of
the Company's well servicing division in the prior fiscal year.
General and administrative expenses increased due primarily to
increased total compensation to the four most senior executive officers.
Interest expense at March 31, 1997 decreased as compared to the prior
comparable quarter due to
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decreased debt. The Company reacquired and cancelled $7,000,000 in principal
amount of its outstanding Debentures on November 1, 1996 thus decreasing the
aggregate annual interest expense attributable to the Debentures by $595,000.
Although the Company is considering redeeming additional Debentures, it may
also incur additional indebtedness under its revolving line of credit 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 one (1) new producing well as operator in the
third quarter of fiscal 1997 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, 1997 and March 31, 1996
A comparison of the Company's operations from the nine-month periods
ended March 31, 1997 and March 31, 1996 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 for the following additional factors.
Interest and other income increased from the prior comparable period a
year ago due to the Company's sale of certain North Dakota properties for a
total consideration of approximately $3,933,000 resulting in a gain of
approximately $2,544,000 before tax effect. This was partially offset by the
sale of certain New Mexico properties which generated a loss before taxes of
$536,000. In the same period a year ago, the Company also sold its Oklahoma
gas properties generating a gain of $489,000 before tax effect. Non-productive
exploration and property abandonment costs were higher than the same period a
year ago due to undeveloped property write-offs and dry hole costs. Production
costs increased due to higher fracturing costs.
Liquidity and Capital Resources
The Company's long-term debt at March 31, 1997 consisted of its
Debentures which had an aggregate outstanding balance of $10,698,000. On
November 1, 1996, the Company redeemed $7,000,000 in principal amount of its
outstanding Debentures. The redemption was carried out in accordance with the
terms of such securities and was effected at a price equal to 100% of the
principal amount of each Debenture so redeemed. It is expected that although
the redemption will significantly and adversely affect the Company's liquidity
in the short term, the Company's liquidity, over time, will be enhanced as a
result of the elimination of approximately $595,000 in annual interest
payments. The Company is actively reviewing the possibility of a significant
additional redemption of the Debentures. Any such redemption would have
effects on the Company's liquidity similar to that of the November 1996
redemption. 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, the 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 cash or other appropriate uses of cash, and other factors in
its discretion. The Company may, in the future, amend the Restated Credit
Agreement to extend the Termination Date
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thereof. The Company presently has no indebtedness under the Restated Credit
Agreement.
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. In this regard, in
the first three quarters of fiscal 1997 the Company sold acreage in North
Dakota for approximately $3,933,000 and certain non-operated properties in
Texas for $1,023,000.
At the present time the Company does not expect its contract drilling
business to be significant and is presently exploring the possibility of
selling three of its four remaining rigs.
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.
Absent additional acquisitions of producing properties, future 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 also pursues 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 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. Based on the formula
compensation plan for the four most senior executive officers of the Company
adopted by the Board of Directors, commencing July 1, 1996, total compensation
(including bonuses) for
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such senior executive officers was estimated to be approximately $2,050,000 for
fiscal 1997. However, since Mr. Ron Amini resigned as an executive officer of
the Company effective November 15, 1996, it is expected that the actual
compensation paid to the senior executive officers (including Mr. Ron Amini
with respect to the portion of the year for which he served) will be
approximately $1,730,000.
On a routine basis, certain of the Company's officers and directors
obtain working interests in certain of the Company's wells. Generally, the
Company will advance monies as operator on behalf of such persons with respect
to their pro rata share of drilling, equipping, leasehold and operating costs.
As of March 31, 1997, the Company had receivables from such persons in the
aggregate amount of $2,048,000. Although the Company may effectively offset
such amounts against sums due such persons with respect to their working
interests ($1,640,000 at March 31, 1997), such costs, until recouped, can
adversely affect the Company's liquidity.
The Company elected not to make a sinking fund payment in fiscal 1997
(which would ordinarily have been due at least one business day before October
15, 1996) 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, if it elects, may presently defer sinking fund
payments until October, 2002.
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
(Registrant)
Date: May 14, 1997 By: /s/ JESSE MINOR
--------------------------------
Jesse Minor
President
Date: May 14, 1997 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, 1997. (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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