<PAGE> 1
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 September 30, 1995 Commission File Number 1-7836
SAGE ENERGY COMPANY
- --------------------------------------------------------------------------------
DELAWARE 75-1542170
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
10101 Reunion Place, Suite 800, San Antonio, Texas 78216-4158
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code (210) 340-2288
------------------
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
----- -----
1,399 shares of $.01 par value common stock were outstanding at November 15,
1995.
<PAGE> 2
SAGE ENERGY COMPANY
10101 Reunion Place, Suite 800
San Antonio, Texas 78216-4158
______________________________________________________________________
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FORM 10-Q
_____________________________________________________________________
PART I
FINANCIAL INFORMATION
_____________________________________________________________________
<PAGE> 3
SAGE ENERGY COMPANY
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Balance Sheets -
September 30, 1995 (Unaudited)
and June 30, 1995 1-2
Statements of Income and
Retained Earnings - Three Months
ended September 30, 1995
and 1994 (Unaudited) 3
Statements of Cash Flow - Three months
ended September 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
</TABLE>
<PAGE> 4
SAGE ENERGY COMPANY
Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, June 30,
1955 1955
------------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,940 $ 3,104
Accounts receivable:
Trade 2,507 1,827
Oil and gas sales 4,438 4,156
Federal income tax receivable 447 712
Inventories--well and production
equipment, at cost 1,417 1,483
Prepaid expenses 242 258
-------- --------
Total current assets 13,991 11,540
-------- --------
Property, plant and equipment, at cost:
Producing oil and gas properties
(successful efforts method) 116,225 118,504
Undeveloped properties 3,992 4,044
Drilling equipment 9,706 9,673
Other 4,225 4,350
--------- ---------
134,148 136,571
Less accumulated depreciation and
depletion (104,294) (106,605)
--------- ---------
29,854 29,966
--------- ---------
Other assets, at cost, net of accumulated
amortization 277 285
---------- --------
$ 44,122 $ 41,791
========== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
1
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SAGE ENERGY COMPANY
Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, June 30,
1955 1955
------------- --------
<S> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable, trade $ 1,872 $ 1,423
Accrued liabilities 4,637 3,665
State income taxes payable 212 197
--------- ---------
Total current liabilities 6,721 5,285
Bonds payable 18,530 18,530
Deferred income taxes 4,247 4,166
--------- ---------
Total liabilities 29,498 27,981
--------- ---------
Stockholder's equity:
Common stock, $.01 par value; authorized
12,000 shares; issued 1,399 shares -- --
Additional paid-in capital 14 14
Retained earnings 14,610 13,796
--------- ---------
Total stockholder's equity 14,624 13,810
Contingent liabilities --------- ---------
$ 44,122 $ 41,791
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
<PAGE> 6
SAGE ENERGY CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Revenues:
Oil and gas sales $ 5,794 $ 7,687
Contract drilling 369 527
Interest and other income 387 159
------- -------
Total revenues 6,550 8,373
------- -------
Costs and expenses:
Oil and gas operations:
Production taxes 287 400
Production costs 1,886 1,823
Nonproductive exploration and property abandonment costs 223 161
------- -------
2,396 2,384
Contract drilling direct costs 251 322
Depreciation, depletion and amortization 1,740 2,183
Geological and geophysical 40 478
General and administrative 554 546
Interest 394 395
------- -------
Total costs and expenses 5,375 6,308
------- -------
Income from operations before income taxes 1,175 2,065
Income tax expense (benefit):
Federal -- current 265 865
State -- current 15 114
Deferred 81 (269)
------- -------
361 710
------- -------
Net income 814 1,355
Retained earnings:
Beginning 13,796 12,868
------- -------
Ending $14,610 $14,223
======= =======
Net income per common share $ 582 $ 969
======= =======
Weighted average number of shares 1,399 1,399
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE> 7
SAGE ENERGY COMPANY
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 814 $ 1,355
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 1,740 2,183
Loss (gain) on disposition of assets (139) 17
Deferred income taxes 81 (269)
Changes in current assets and liabilities:
Accounts receivable (962) (178)
Federal income tax receivable 265 13
Inventories 66 (97)
Prepaid expenses 16 (229)
Accounts payable 449 85
Accrued liabilities 972 403
Federal income taxes payable - 828
State income taxes payable 15 114
------- -------
Total adjustments 2,503 2,870
------- -------
Net cash provided by operating activities 3,317 4,225
------- -------
Cash flows from investing activities:
Proceeds from sales of assets 1,463 118
Capital expenditures (2,944) (1,622)
------- -------
Net cash used in investing activities (1,481) (1,504)
------- -------
Cash flows from financing activities:
Bank debt repayments - -
------- -------
Net cash used in financing activities - -
------- -------
Net increase in cash and cash equivalents 1,836 2,721
Cash and cash equivalents:
Beginning of period 3,104 5,192
------- -------
End of period $ 4,940 $ 7,913
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 8
SAGE ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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
September 30, 1995, and the results of operations and cash flows for the three
months then ended. The results of operations for the three-month period ended
September 30, 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 September 30, 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 three-month period ended September 30, 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.
5
<PAGE> 9
NOTE 6
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.
6
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Financial Position
September 30, 1995 and June 30, 1995
The Company's current ratio was 2.08 to 1 at September 30,
1995 as compared to the June 30, 1995 current ratio of 2.18 to 1. Cash on hand
at September 30, 1995 was $4,940,000 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 September 30, 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 $2,944,000 for capital expenditures as described below.
The Company's net fixed assets decreased slightly during
the first quarter of fiscal 1995 primarily as a result of the sale of the
Company's Oklahoma gas properties ($436,000) and certain North Dakota
properties ($443,000) and by depletion and depreciation charges of $1,740,000
and by write-offs of plugged and abandoned properties, non productive
properties, expired leases of approximately $152,000. This decrease was
partially offset by 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").
Only one of the Company's drilling rigs was active during the first quarter of
fiscal 1996.
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 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 September 30, 1995 and September 30, 1994
The Company's oil and gas revenues were lower in the first
quarter of fiscal 1996 than the prior comparable quarter primarily as a result
of lower oil and gas production. Production was lower primarily as a result of
decreased drilling activities and the natural decline in the Austin Chalk Trend
area where a majority of the Company's horizontal drilling takes place and due
to the sale of the Company's Oklahoma properties effective August 1, 1995. As
compared to the first quarter of the prior comparable year, lower oil
production had a negative effect on revenue of approximately $737,000, lower
gas prices of approximately $415,000, and lower gas production of $620,000.
Average oil prices were lower than the prior comparable quarter,
7
<PAGE> 11
$16.70 vs. $17.12, which amounts to an approximate revenue decrease of
$120,000.
Interest and other income increased due to the Company's
sale of its Oklahoma gas properties effective August 1, 1995. The properties
were sold for $925,000 which generated a gain of $489,000 before tax effect.
Interest expense at September 30, 1995 decreased slightly
as compared to the prior comparable quarter due to decreased debt. The Company
reacquired and cancelled $50,000 in principal amount of its outstanding 8 1/2%
Subordinated Debentures due 2005 (the" Debentures") during the period of
September 30, 1994 through September 30, 1995 thus decreasing the aggregate
annual interest expense attributable to the Debentures by $4,250. 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.
Expenses related to depreciation, depletion, and
amortization costs decreased from the prior year as a result of, among other
things, 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 five (5) new producing wells as
operator in the first 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.
Liquidity and Capital Resources
The Company's long-term debt at September 30, 1995,
consists of its convertible Debentures which have an aggregate outstanding
balance of $18,530,000. Subsequent to September 30, 1995, the Company acquired
and cancelled debentures with aggregate principal of $500,000 thus further
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 September 30, 1995, the Company had not drawn funds
under the revolving credit facility.
8
<PAGE> 12
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, there has been
$500,000 face repurchase by the Company of its Debentures 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 to 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 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 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
9
<PAGE> 13
financial condition of the Company, and other factors may warrant. Any such
payment of dividends would adversely affect capital resources and liquidity.
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 November, 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.
10
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Inflation
The rate of inflation has had no significant effect on the
Company's operations for some time.
____________________________
11
<PAGE> 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule
12
<PAGE> 16
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: November 15, 1995 By: /s/ Jesse Minor
----------------------------------
Jesse Minor
President
Date: November 15, 1995 By: /s/ Stanley A. Paris, Jr.
----------------------------------
Stanley A. Paris, Jr.
Vice President-Finance
Principal Accounting Officer
13
<PAGE> 17
INDEX TO EXHIBITS
Exhibit
Number
27 Exhibit 27.1 Financial Data Schedule for Three months Ended
September 30, 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.)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,940
<SECURITIES> 0
<RECEIVABLES> 7,392
<ALLOWANCES> 0
<INVENTORY> 1,417
<CURRENT-ASSETS> 13,991
<PP&E> 134,148
<DEPRECIATION> 104,294
<TOTAL-ASSETS> 44,122
<CURRENT-LIABILITIES> 6,721
<BONDS> 18,530
<COMMON> 0
0
0
<OTHER-SE> 14,624
<TOTAL-LIABILITY-AND-EQUITY> 44,122
<SALES> 5,794
<TOTAL-REVENUES> 6,550
<CGS> 3,913
<TOTAL-COSTS> 251
<OTHER-EXPENSES> 817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394
<INCOME-PRETAX> 1,175
<INCOME-TAX> 361
<INCOME-CONTINUING> 814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 814
<EPS-PRIMARY> 582
<EPS-DILUTED> 0
</TABLE>
