<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 0-9378
ENEX RESOURCES CORPORATION
(Name of small business issuer in its charter)
DELAWARE 93-0747806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 LAMAR STREET
SUITE 1020
HOUSTON, TEXAS 77010
(Address of principal executive offices)(Zip Code)
ISSUER'S TELEPHONE NUMBER: (713) 759-6808
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.05 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[x]
Revenues of the issuer for its most recent fiscal year are $7,394,035
The aggregate market value of the voting stock held by
non-affiliates based upon the closing price of the stock on April 5, 1999 of
$3.50 was $434,675.
As of April 5,1999, the issuer had 1,342,672 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Item 13(a) includes the Index of Exhibits to be filed with the Securities and
Exchange Commission relative to this Report.
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<PAGE>
TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
ENEX RESOURCES CORPORATION
<TABLE>
ITEM NO. PART I PAGE
<S> <C> <C>
1 Description of Business I-1
2 Description of Property I-3
3 Legal Proceedings I-6
4 Submission of Matters to a Vote of Security Holders I-6
PART II
-------
5 Market for Common Equity and
Related Stockholder Matters II-1
6 Management's Discussion and Analysis
and Results of Operations II-1
7 Financial Statements and Supplementary Data II-11
8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure II-12
PART III
--------
9 Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act III-1
10 Executive Compensation III-3
11 Security Ownership of Certain
Beneficial Owners and Management III-5
12 Certain Relationships and Related Transactions III-7
13 Exhibits and Reports on Form 8-K III-8
Signatures S-1
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Enex Resources Corporation ("Enex" or the "Company") was
incorporated on August 17, 1979 in Colorado. On June 30, 1992, the Company
reincorporated in Delaware. The Company is engaged in the business of
acquiring interests in producing oil and gas properties. The Company's
operations are concentrated in a single industry segment.
The Company's principal executive office is maintained at 1221
Lamar Street, Suite 1020, Houston, Texas 77010. The telephone number at this
office is (713) 759-6808. The Company has no regional offices.
As of December 31, 1998, the Company employed 5 persons. Two of
the employees are temporary.
Since 1982, the Company has financed most of its oil and gas
activities through the public sale of interests in limited partnerships
formed to purchase and hold working interests and other operating and non
operating interests in producing oil and gas properties (the "Partnerships").
From 1982 through 1994, the Company formed 56 limited partnerships with
aggregate investor subscriptions of $224 million received from 69,139
investors, including reinvestors. Producing property acquisitions for those
partnerships totaled approximately $201 million.
During 1995 through 1997, eleven partnerships, with aggregate
investor subscriptions totaling approximately $54 million were liquidated.
Effective June 30, 1997, the remaining thirty-four partnerships were
consolidated into Enex Consolidated Partners, L.P. (the "Consolidated
Partnership"). The limited partners in the thirty-four partnerships were
issued 1,102,631 units in the Consolidated Partnership. The Company's
receivables and its general partner capital balances from the consolidated
partnerships were converted into limited partner units in the Consolidated
Partnership. These interests combined with the Company's limited partner
interests in the consolidated partnerships gave the Company a 55.5% limited
partner interest in the Consolidated Partnership, together with a 4.1%
carried revenue interest as the general partner of the Consolidated
Partnership. General and administrative savings and simplification, risk
reduction, oil and gas reserve diversification and expansion were the primary
reasons for the formation of the Consolidated Partnership. Subsequent to the
formation of the Consolidated Partnership, the Company has acquired
additional limited partner units such that its limited partner interest at
October 1, 1998 was approximately 56.2%
On February 19, 1998, Middle Bay Oil Company, Inc. ("Middle Bay")
began a $15 per share cash tender offer for 100% of the outstanding common
stock of the Company. Middle Bay is an independent oil and gas company,
headquartered in Houston, Texas, engaged in the exploration, development and
production of oil and gas in the contiguous United States. Middle Bay's
common stock trades on the Nasdaq SmallCap Market. At the expiration of the
tender offer on March 27, 1998, 1,064,432 common shares (79.2%) of the
Company were tendered for an aggregate price of $15,966,480. After the close
of the tender offer, the Company's officers and directors were replaced with
the officers and directors of Middle Bay and the Company's headquarters were
moved to Middle Bay's headquarters at 1221 Lamar Street, Suite 1020, Houston,
Texas 77010.
On November 27, 1998 Middle Bay filed with the Securities and
Exchange Commission an offer to purchase 100% of the limited partners units
of the Consolidated Partnership (the "Exchange Offer"). The Exchange Offer
involved the issuance of 2,177,481 shares of Middle Bay Series C preferred
stock (the "Series C") and payment of approximately $539,000 in cash in
exchange for all of the outstanding limited partner units of the Consolidated
Partnership, the transfer of the Consolidated Partnership's assets and
liabilities to Middle Bay effective October 1, 1998, and the dissolution of
the Consolidated Partnership. The Exchange Offer valued each Consolidated
Partnership unit at $10.43 and the unitholders had the option of exchanging
their units for the Series C (at a conversion ratio of 2.086 Series C shares
for each of the total 1,102,631 outstanding Consolidated Partnership units)
or exercising
I-1
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dissenters' rights and receiving a cash payment for their interests. The
Company did not exercise its dissenters' rights and was issued 1,293,522
Series C shares for its limited partner interest in the Consolidated
Partnership.
The Series C entitles the holder to cash dividends at the rate of
10% per year (payable semi-annually on March 31 and September 30), a $5.00
per share liquidation preference and conversion, at any time, of each Series
C share into one share of Middle Bay common stock. After January 1, 2000,
Middle Bay may, at its option, redeem the Series C for the liquidation value
plus accrued dividends. Middle Bay has applied to list the Series C on the
NASDAQ Small Cap Market. Dividends began to accrue on December 30, 1998.
FORWARD-LOOKING STATEMENTS
This document includes "forward-looking statements" within the
meaning of various provisions of the Securities Act and Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. All statements,
other than statements of historical facts, included in this document that
address activities, events, or developments that the Company expects or
anticipates will or may occur in the future, including such things as
estimated future net revenues from oil and natural gas reserves and the
present value thereof, future capital expenditures (including the amount and
nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion, and growth of the Company's business
and operations, plans, references to future success, references to intentions
as to future matters and other such matters are forward-looking statements
and include statements regarding interest, belief or current expectations of
the Company, its directors, or its officers regarding such matters. These
statements are based on certain assumptions and analyses made by the Company
in light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it
believes are appropriate under the circumstances. However, whether actual
results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, including the
risk factors discussed in this document, general economic, market or business
conditions, the opportunities (or lack thereof) that may be presented to and
pursued by the Company, competitive actions by other oil and gas companies,
changes in laws or regulations, and other factors, many of which are beyond
the control of the Company. Consequently, all of the forward-looking
statements made in this document are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on the
Company or its business or operations.
COMPETITION, MARKETS AND REGULATION
Competition in the exploration and property acquisition markets is
intense. In seeking to obtain desirable Leases and exploration Prospects, the
Company faces competition from both major and independent oil and gas
companies, as well as from numerous individuals. Many of these competitors
have substantial financial resources available to them, which makes for
increased competition.
The ability of the Company to market oil and gas from its wells will
depend upon numerous factors beyond its control, including, but not limited
to, the extent of domestic production and imports of oil and gas, the
proximity of the Company's production to existing pipelines, the availability
of capacity in such pipelines and state and federal regulation of oil and gas
production. There is no assurance that the Company will be able to market all
of the oil or gas produced by it or that favorable prices can be obtained for
the oil and gas it produces. In view of the uncertainties affecting the
supply and demand of oil and gas, the Company is unable to accurately predict
future oil and gas prices and demand, or the overall effect they will have on
the Company.
Numerous federal and state laws and regulations affect the Company's
operations. In particular, oil and gas production operations are affected by
tax and other laws relating to the petroleum industry and any changes in such
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laws and regulations. Some of the rules and regulations carry substantial
penalties for failing to comply. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business. The Company's
activities are also subject to numerous federal, state and local
environmental laws and regulations governing the discharge of materials. In
most cases, the applicable regulatory requirements relate to water and air
pollution control or solid waste management measures. The Company believes
the recent trend toward stricter standards in environmental legislation,
regulation and enforcement will continue. To date, these laws have not had a
significant impact on the Company but no assurance can be given as to the
effect of these laws on the Company in the future.
ITEM 2. DESCRIPTION OF PROPERTY
OIL AND GAS PROPERTIES
Until 1986, the Company had acquired most of its interests in
producing oil and gas properties through purchases made by the Partnerships.
Prior to 1995, the Partnerships acquired approximately $201 million of
producing oil and gas properties. Effective June 30, 1997, thirty-four
limited partnerships consolidated to form the Consolidated Partnership in
which the Company, as general partner, owned a 4.1% interest in net revenues
and gains generated by properties owned by the Consolidated Partnership in
addition to a 56.2% limited partner interest. Effective October 1, 1998, the
Company exchanged its general and limited partner interest in the
Consolidated Partnership for Middle Bay Series C preferred stock. Due to this
exchange, the Company no longer has an indirect ownership in the oil and gas
reserves attributable to the Consolidated Partnership.
Effective October 1, 1998, all of the oil and gas reserves owned
by the Consolidated Partnership were transferred to Middle Bay. At December
31, 1998, the reserves attributable to the Company are those reserves owned
directly by the Company.
The producing oil and gas properties in which the Company owns
interests are all located within the United States. The Company's interests
in these properties at December 31, 1998 are summarized below:
<TABLE>
<CAPTION>
Developed Acres Undeveloped Acres
--------------- -----------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Working Interests 5,962 2,476 0 0
Royalty Interests 702 66 0 0
</TABLE>
"Developed acres" are acres spaced or assigned to productive wells.
"Undeveloped acres" are those leased acres on which wells have not been
drilled or completed to a point that permits the production of commercial
quantities of oil and gas, regardless of whether such acreage contains proved
reserves.
A "gross acre" is an acre in which an interest is owned. The number of
gross acres is the total number of acres in which such interest is owned.
A "net working interest acre" is deemed to exist when the sum of
fractional working interests owned in gross acres equals one. The number of
net working interest acres is the sum of fractional working interests owned
in gross acres expressed as a whole number.
A "net royalty acre" is deemed to exist when the sum of fractional
royalty interests owned in gross acres equals one. The number of net royalty
acres is the sum of fractional royalty interests owned in gross acres
expressed as a whole number.
I-3
<PAGE>
PROPERTY ACQUISITIONS
No significant oil and gas acquisitions were made by the Company over
the three year period 1996 through 1998.
I-4
<PAGE>
NET OIL AND GAS PRODUCTION
The following table shows for the years ended December 31, 1998, 1997
and 1996, the approximate production attributable to the Company's oil and gas
interests including interest derived through the Company's interests in the
Partnerships. The production for the years ended December 31, 1996 and 1997
include production from the reserves owned directly by the Company and from
reserves owned indirectly by the Company through its general and limited
partner interests in the Partnerships. The production for the year ended
December 31, 1998 includes production from the reserves owned directly by the
Company and from reserves owned indirectly by the Company through its general
and limited partner interests in the Partnerships for the nine months ended
September 30, 1998 and, for the three months ended December 31, 1998,
includes only production from the reserves owned directly by the Company. All
production occurred in the United States.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Crude oil and condensate (Bbls) 227,976 277,229 177,793
Natural gas - leasehold or royalty (Mcf) 1,461,306 1,735,704 1,649,530
Natural gas liquids (Bbls) (1) -- 33,019 34,316
Natural gas - gas plant sales (Mcf) (1) 4,992 220,193 232,778
</TABLE>
The following table sets forth the Company's average sales price per
barrel of oil, per Mcf of gas, per barrel of natural gas liquids ("NGL"), per
Mcf of gas plant gas sales and average production cost per unit produced for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Average sales price per Bbl of crude oil and condensate $ 11.92 $ 17.20 $ 19.42
Average sales price per Mcf of natural gas 2.15 2.49 2.32
Average production cost per equivalent barrel of production 7.13 6.93 6.19
Average sales price per Bbl of NGL (1) - 12.16 13.34
Average sales price per Mcf of gas plant gas (1) - 2.73 1.96
Average production cost per equivalent Bbl of NGL production (1)(2) - 11.35 9.10
</TABLE>
(1) Natural gas liquids production and gas plant gas sales were obtained
through gas processing plant ownership rather than through leasehold
ownership.
(2) Includes cost of gas purchased at plants for processing.
I-5
<PAGE>
The following table shows, as of December 31, 1998, the approximate
number of gross and net producing oil and gas wells in which the
Company owns a direct interest.
<TABLE>
<CAPTION>
Productive Oil Wells Productive Gas Wells
-------------------- --------------------
Net Working Net Working
Gross Interest Gross Interest
Wells Wells Wells Wells
----- ----- ----- -----
<S> <C> <C> <C>
127 16.87 64 40.76
</TABLE>
"Productive wells" are producing wells and wells capable of production,
including shut-in wells.
A "gross well" is a well in which a working interest is held. The number
of gross wells is the total number of wells in which a working interest is
owned.
A "net working interest ("W.I.") well" is deemed to exist when the sum of
fractional interests owned in gross W.I. wells equals one. The number of net
W.I. wells is the sum of the fractional interests owned in gross W.I. wells,
expressed as whole numbers and fractions thereof.
OIL AND GAS RESERVES
As of December 31, 1998, the proved oil and gas reserves reported herein
for the Company are based primarily on engineering studies performed by the
petroleum engineering consulting firms of H.J. Gruy and Associates, Inc. and Lee
Keeling and Associates, Inc. As of December 31, 1997 the proved oil and gas
reserves reported herein for the Company are based primarily on engineering
studies performed by the Company's engineering staff. As of December 31, 1998
and 1997, proved oil and gas reserves reported herein for the Partnerships and
for the Company's share of such Partnership reserves are based primarily on
engineering studies performed by the petroleum engineering consulting firm of H.
J. Gruy and Associates, Inc. The reserves included in this report are estimates
only and should not be construed as exact quantities. Future conditions may
affect recovery of estimated reserves and revenues, and all reserves may be
subject to revision as more performance data becomes available. The proved
reserves used in this report conform to the applicable definitions promulgated
by the Securities and Exchange Commission. No major discovery or other favorable
or adverse event that is believed to have caused a significant change in the
estimated proved reserves has occurred since December 31, 1998.
DRILLING ACTIVITIES
In 1998 and 1997, the Company and the Consolidated Partnership did
not participate in any significant developmental or exploratory drilling. In
1996, the Company and the Partnerships participated in the drilling of twelve
oil wells and six gas wells, all of which were successful. The wells were
drilled in Texas, Wyoming, Louisiana, and Oklahoma.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiary are a party or to which any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION Due to the failure to meet the NASDAQ listing
requirement after the completion of the tender offer, the common
shares of the Company were delisted from the NASDAQ National
Market. The stock is currently quoted on the OTC Bulletin Board.
The quotations represent prices in the over-the-counter market
between dealers in securities and do not include retail markup,
markdown or commissions and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1998 1997
---- ------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 15.00 10.50 10.75 9.25
Second Quarter 14.81 14.31 10.75 8.50
Third Quarter 14.31 8.00 12.88 9.25
Fourth Quarter 11.00 5.00 13.25 10.25
</TABLE>
On April 5, 1999 the closing price of the common stock was $3.50 bid
and $10.25 asked.
(b) HOLDERS As of April 5, 1999 the Company had approximately 527
holders of record of its common stock, which does not include an
unknown number of additional holders whose stock is held in "street
name"
(c) DIVIDEND POLICY The Company paid no dividends in 1998. The Company
paid semi-annual dividends in December and June of 1997 of $.15 per
common share. In December 1997, the Company also paid an additional
special dividend of $.10 per common share. As a result, the Company
paid dividends totaling $.40 per common share in 1997. Any future
determination as to the payment of dividends will be made at the
discretion of the Board of Directors and will depend on a number of
factors, including the future earnings, capital requirements, financial
condition and future prospects of the Company, and any other factors as
the Board of Directors may deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's financial statements and notes thereto set forth in Item 7.
(a) RESULTS OF OPERATIONS
The factors that most significantly affect the Company's results of
operations are (i) the sales price of crude oil and natural gas, (ii) the level
of production volumes, (iii) the level of lease operating expenses, (iv) the
level of interest rates and (v) the level of general and administrative
expenses. Sales of production and level of borrowing capacity are significantly
impacted by the Company's ability to maintain or increase its production from
existing oil and gas properties or through its exploration and development
activities. Sales prices received by the Company for oil and gas have fluctuated
significantly from period to period. The fluctuations in oil prices during these
periods
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reflect market uncertainty regarding the inability of OPEC to control
the production of its member countries, production from Iraq, as well as
concerns related to the global supply and demand for crude oil. Gas prices
received by the Company fluctuate generally with changes in the spot market
price for gas. Relatively modest changes in either oil or gas prices
significantly impact the Company's results of operations and cash flow and could
significantly impact the Company's borrowing capacity.
(b) FISCAL 1998
In 1998, the Company recorded a net loss of $619,157 or $0.46 per
share. This compares to net income of $1,965,675 or $1.45 per share in 1997. The
decrease in net income from 1997 to 1998 was primarily the result of lower oil
and gas revenues and lower gas plant revenues offset partially by a lower
minority interest deduction. Revenues and expenses for the nine months ended
September 30, 1998 include the Company and the Consolidated Partnership on a
fully consolidated basis. Revenues and expenses subsequent to September 30, 1998
include only those attributable to the Company and excludes the revenues and
expenses of the Consolidated Partnership because it was sold to Middle Bay,
effective October 1, 1998.
Oil, natural gas and gas plant sales were $5,877,445 in 1998 verses
$10,095,642 in 1997. This represents a decrease of $4,218,197 or 42%. Oil sales
were $2,717,991 and $4,771,413 in 1998 and 1997 respectively. This represents a
decrease of $2,053,422 or 43%. An 18% decrease in oil production and a 31%
decline in oil prices resulted in lower oil revenues in 1998. Gas sales were
$3,141,721 in 1998 versus $4,321,903 in 1997. This represents a decrease of
$1,180,182 or 27%. A 16% decrease in gas production and a 14% decline in gas
prices resulted in lower gas revenues. The decrease in oil and gas production
was primarily the result of sales of several properties effective September 1,
1998, sale of the Consolidated Partnership effective October 1, 1998 and normal
production decline. The decrease in the average oil and gas prices corresponds
with lower market prices for oil and gas. Gas plant sales were $17,733 in 1998
versus $1,002,326 in 1997. The decease was due to the sale of the Dover
Hennessey Gas Plant by the Consolidated Partnership effective January 1, 1998.
The gain on the sale of assets in 1998 of $1,199,272 included the gain
on the sale of the gas plant, the sale of several oil and gas properties in
September 1998 and the sale of the Company's interest in the Consolidated
Partnership.
Other income was $22,494 versus $226,658 in 1997. The decrease was due
primarily to no rig rental revenues in 1998 due to the sale of the rig in 1997,
the gain of $50,000 on the rig sale in 1997 and the lawsuit settlement of
$20,000 on the gas plant in 1997.
General and administrative expenses were $2,216,352 in 1998 versus
$2,061,090 in 1997. This increase was primarily the result of the $826,250
expense related to the buyout of the outstanding stock options in conjunction
with the successful tender offer by Middle Bay in March 1998. Excluding the
option buyout expense, general and administrative expenses decreased $670,988.
The decrease in general and administrative expenses, excluding the stock buyout
expense, was due primarily to the consolidation of the Company's operations with
Middle Bay and the associated reduction in the workforce.
Lease operating expenses and production taxes were $3,361,006 in 1998
versus $3,983,129 in 1997. The decrease was primarily due to the sale of several
properties effective September 1, 1998, the sale of the Consolidated Partnership
effective October 1, 1998 and lower oil and gas production.
Gas purchases and plant operating expenses were $58,832 in 1998 versus
$791,403. The decease was due to the sale of the Dover Hennessey Gas Plant by
the Consolidated Partnership effective January 1, 1998.
The impairment expense in 1998 of $189,211 was due to the decline in
the value of an oil field due to the decline in oil prices. The impairment
expense was computed applying the guidelines of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
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<PAGE>
The minority interest deduction of $414,888 in 1998 declined $597,561
from $1,012,449 in 1997. The primary reason for the decline was the sale of the
Consolidated Partnership effective October 1, 1998 and the lower level of oil
and gas revenue attributable to the Consolidated Partnership before its sale.
II-3
<PAGE>
(c) Fiscal 1997
In 1997, the Company recorded net income of $1,965,675 or $1.45 per
share. This compares to a loss of $2,321,521 or $1.70 per share in 1996. The
loss in 1996 was a result of a $3,908,370 non-recurring impairment of property.
Absent this impairment, the Company earned $1,586,849 in 1996. The increase in
net income from 1996 to 1997 was primarily the result of increased revenues
resulting from the conversion of receivable and capital balances into limited
partnership interest in the Consolidated Partnership, coupled with relatively
lower operating costs. Revenues and expenses for the six months ended December
31, 1997 include the Company and the Consolidated Partnership on a fully
consolidated basis. Revenues and expenses prior to June 30, 1997, include the
Partnerships on a pro rata consolidation for those partnerships in which the
Company owned less than a 50% interest and full consolidation for those
partnerships in which the Company owned greater than a 50% interest.
Oil, natural gas and gas plant sales were $10,095,642 in 1997 and
$8,202,331 in 1996. Sales increased by $1,893,311 or 23% in 1997. Oil sales
increased by $1,316,289 or 38% in 1997 from 1996. A 56% increase in oil
production increased oil sales by $1,931,047. This increase was partially offset
by a 12% decrease the average oil sales price. Gas sales increased by $490,289
or 13%. A 5% increase in gas production increased sales by $199,924. A 7%
increase in the average gas sales price increased gas sales an additional
$290,365. Gas plant sales increased by $86,733 or 9%. A 15% increase in the
average sales price of gas plant products increased sales by $128,976. This
increase was partially offset by a 5% decrease in the production of gas plant
products. The increases in oil and gas production were primarily the result of
the recognition of the Consolidated Partnership on a fully consolidated basis
after June 30, 1997. The decrease in gas plant production was primarily due to
natural production decline. The decrease in average oil sales prices corresponds
with lower prices in the overall market for the sale of oil. The increases in
the average gas and gas plant products sales prices correspond with higher
prices in the overall markets for the sale of gas and gas plant products.
Other income was a net $226,658 in 1997 as compared with $88,259 in
1996. Such income included rig rental revenues of $83,239 and $153,346 in 1997
and 1996, respectively. Also included in the 1997 other income was $50,000 for
the sale of a drilling rig and $20,000 from a lawsuit settlement on the Dover
Hennessey gas plant. Also included in the 1996 other income was a net loss of
$125,015 on the liquidation of managed partnerships. The increase in other
income in 1997 was primarily the result of the sale of the drilling rig.
General and administrative expenses increased to $2,061,090 in 1997
from $1,826,762 in 1996. This represents an increase of $234,328 from 1996 to
1997. This increase was primarily the result of the recognition of minority
interest in the Consolidated Partnership.
Lease operating expenses were $3,455,717 in 1997 as compared to
$2,490,701 in 1996. Lease operating expenses increased by $965,016 or 39% from
1996 to 1997. The increase was primarily a result of the increased production,
as noted above, resulting from the recognition of minority interest in the
Consolidated Partnership.
Depletion, depreciation and amortization expense ("DD&A") was
$1,633,771 in 1997 and $1,338,602 in 1996. DD&A increased by $295,169 or 22%
from 1996 to 1997. The changes in production, noted above, increased DD&A by
$281,530. A 1% increase in the depletion rate increased DD&A by an additional
$13,639. The increase in the DD&A rate in 1997 was primarily the result of a
downward revision of the gas reserves during December 1997, partially offset by
an upward revision of the oil reserves.
In 1997, the Company earned $217,645 of net interest income as compared
to $35,039 in 1996. Net interest income increased in 1997 from 1996 due to the
return on investment of excess cash during 1997.
The Company recognized deferred income tax expense of $16,082 in 1997.
This compares to the recognition of deferred income tax credits of $92,981 in
1996. The income tax expense represents the utilization of the Company's
deferred tax asset in 1997. The income tax credits represent the recognition of
a portion of the Company's deferred tax asset that is expected to be realized in
future years. At December 31, 1997, the Company had a deferred tax asset of
$6,105,148. Due to uncertainties inherent in the oil and gas market, a valuation
allowance reserved all
II-4
<PAGE>
but $725,328 of the asset.
(d) EFFECTS OF OIL AND GAS PRICE FLUCTUATIONS
Fluctuations in the price of crude oil and natural gas significantly
affect the Company's operations and the value of its assets. As a result of the
instability and volatility of crude oil and natural gas prices, financial
institutions have become more selective in the energy lending area and have
reduced the percentage of existing reserves that may qualify for the borrowing
base to support energy loans.
The Company's principal source of cash flow is the production and sale
of its crude oil and natural gas reserves which are depleting assets. Cash flow
from oil and gas production sales depends upon the quantity of production and
the price obtained for that production. An increase in prices permits the
Company to finance its operations to a greater extent with internally-generated
funds, allows the Company to obtain equity financing more easily and lessens the
difficulty of attracting financing alternatives available to the Company from
industry partners and nonindustry investors. However, price increases heighten
the competition for Leases and Prospects, increase the costs of exploration and
development activities and increase the risks associated with the purchase of
Producing Properties.
A decline in oil and gas prices (i) reduces the cash flow internally
generated by the Company, which in turn reduces the funds available for
exploring for and replacing oil and gas reserves, (ii) increases the difficulty
of obtaining equity financing, (iii) reduces the number of Leases and Prospects
available to the Company on reasonable economic terms and (iv) increases the
difficulty of attracting financing alternatives available to the Company from
industry partners and nonindustry investors. However, price declines reduce the
competition for Leases and Prospects and correspondingly reduce the prices paid
for Leases and Prospects. Furthermore, exploration and production costs
generally decline, although the decline may not be at the same rate of decline
of oil and gas prices.
Since October, 1997, the price of oil has declined dramatically. The
posted price of WTI crude oil has declined from a high of approximately $20.00
per barrel in October 1997 to lows in December 1998 of approximately $8.00 per
barrel. Oil prices in March 1999 had recovered to approximately $12.50 per
barrel. Gas prices peaked in November 1997, and on average, have declined
slightly during the current period.
(e) SEASONALITY
The results of operations of the Company are somewhat seasonal
due to seasonal fluctuations in the price for natural gas. Generally, natural
gas prices are higher in the first and fourth quarter of the year due to colder
winter weather and resulting higher demand for natural gas during these months.
Due to these seasonal fluctuations, results of operations for individual
quarterly periods may not be indicative of results on an annual basis.
(f) INFLATION AND CHANGING PRICES
Inflation principally affects the costs required to drill,
complete and operate oil and gas wells. In recent years, inflation has had a
minimal effect on the operations of the Company. Costs have generally declined
recently due to the decrease in drilling activity in the United States. Unless
increasing oil and gas prices spur large increases in industry activities,
management believes costs will remain relatively stable over the next year.
(g) CAPITAL RESOURCES AND LIQUIDITY -- FISCAL 1998 AND FISCAL 1997
II-5
<PAGE>
Cash flows from operating activities declined to a negative $80,605
in 1998 compared to $2,519,016 in 1997. The $2,599,621 decrease in cash flow
was due primarily to lower cash flow from oil and gas operations (oil and gas
revenues less lease operating expenses and production taxes). Oil and gas
prices decreased 31% and 14%, respectively, while oil and gas production
decreased 18% and 16%, respectively. The cash flow from operations included
cash distributions to minority limited partners in the Consolidated
Partnership of $1,277,468 and $1,467,564, for the years ended December 31,
1998 and 1997, respectively.
The primary sources of cash in 1998 were proceeds from property sales
and cash on hand. The Company sold several properties in 1998 and received
$2,469,850. The majority of the oil and gas properties were sold effective
September 1, 1998. Cash on hand at January 1, 1998 was $4,244,470 and included
the cash attributable to the Consolidated Partnership and the Company. The
primary uses of cash in 1998 were advances to Middle Bay, cash distributions to
the minority interest owners in the Consolidated Partnership and cash
distributed to Middle Bay in the sale of the Consolidated Partnership. Property
additions of $350,418 were minor and related to developmental work on several
old fields. The cash distributed in the sale of the Consolidated Partnership was
the cash on hand, on the effective date of the sale, of $1,136,431. The
partnership distributions represent cash payments to the minority interest
owners in the Consolidated Partnership.
Working capital at December 31, 1998 was $122,006 compared to
$5,595,347 in 1997. The decline in working capital was due primarily to cash
advances to Middle Bay, cash distributions to the minority interest owners in
the Consolidated Partnership and the transfer of the cash attributable to the
Consolidated Partnership at its sale effective October 1, 1998.
INVESTMENT IN SERIES C PREFERRED STOCK OF MIDDLE BAY
In connection with the divestiture of the Consolidated Partnership the
Company received 1,293,522 shares of Series C preferred stock ("Series C").
As a holder of Series C the Company is entitled to receive cumulative
cash dividends in an amount per share of $0.50 per year (10% annual rate),
payable semi-annually on March 31 and September 30 of each year. These dividends
are payable in preference to and prior to the payment of any dividend or
distribution to any holder of Middle Bay common stock or other junior security.
The Series C dividends began to accrue on December 30, 1998. Middle Bay's
primary bank has granted Middle Bay a waiver allowing it to pay the dividends on
the Series C as long as no default or event of default exists or would exist as
a result of any Series C dividend payment.
If Middle Bay pays the dividends on the Series C as scheduled, the
Company will receive approximately $485,000 in 1999 and $647,000 every year
thereafter until redemption by Middle Bay or conversion by the Company. Middle
Bay is not obligated to pay the cash dividends as scheduled and has the right to
suspend payment and accrue the dividends. The payment of the Series C dividends
is also dependent on the agreements between Middle Bay and its principal
creditors and Middle Bay's compliance with the terms of its credit agreements.
Middle Bay had approximately $27.5 million in long-term debt outstanding on
December 31, 1998. There can be no assurance that Middle Bay will pay the Series
C dividends as scheduled.
The Series C has a liquidation preference of $5.00 per share plus an
amount equal to all accumulated, accrued and unpaid dividends. The liquidation
preference of Series C ranks on parity with Middle Bay's Series B Preferred
Stock outstanding. As of December 31, 1998, Middle Bay had no other preferred
stock outstanding.
Currently, no trading market exists for the Series C. Middle Bay has
applied for listing the Series C for trading on the NASDAQ Small Cap Stock
Market. The listing has not yet been approved. There can be no assurance that
the Series C will be approved for trading on the NASDAQ Small Cap Stock Market
II-6
<PAGE>
NOTE RECEIVABLE FROM MIDDLE BAY
The Company has a note receivable from Middle Bay, an owner of 80% of
the outstanding common stock of the Company, as of December 31, 1998 of
$5,148,000. The principal balance of the note accrues interest at the prime rate
and is due on demand. The note consists of advances to Middle Bay for general
corporate purposes and is unsecured. Interest of $227,000 was accrued on the
note as of December 31, 1998. There can be no assurance that Middle Bay will pay
the note if payment is demanded or that Middle Bay will have the financial
capability to pay the note at any time in the future.
CREDITORS HOLD SECURITY INTERESTS IN CERTAIN OIL AND GAS ASSETS OF THE COMPANY
Middle Bay financed its tender offer with cash provided by Compass Bank
and Bank of Oklahoma (the "Banks"). The debt proceeds used to finance the tender
offer, approximately $15.9 million, was shown on the balance sheet of Middle
Bay. Pursuant to the terms of the credit agreement between Middle Bay, the
Company and the Banks, the Banks hold a security interest in certain oil and gas
properties of the Company. If certain properties are sold by the Company an
amount determined by the Banks would have to be paid on the outstanding
principal balance of the debt. The debt payment could be made by Middle Bay or
the Company. Amounts paid to the Banks by the Company would reduce the amount of
sales proceeds that the Company wold retain. Amounts paid to the Banks by Middle
Bay would reduce the amount of cash available to be paid to the Company. The
principal balance of debt outstanding on Middle Bay's financial statements at
December 31, 1998 was approximately $27.5 million.
DEPENDENCE ON MIDDLE BAY
A substantial portion of the Company's assets are directly related to
Middle Bay. Approximately $11.6 million of the Company's $13.1 million in total
assets are obligations of Middle Bay. The payment of the note receivable and the
value of the Series C are directly related to the success of Middle Bay. Middle
Bay's operations are subject to all of the risks inherent in the oil and gas
exploration and production industry. There can be no assurance that Middle Bay
will be a successful participant in the oil and gas exploration and production
industry.
FUTURE CAPITAL REQUIREMENTS
The Company does not anticipate making substantial capital expenditures for
acquisition, development or exploration of oil and natural gas reserves in the
future. The Company expects to make expenditures to develop its current proved
undeveloped reserves and to maintain its proved developed reserves. The Company
expects to incur a minimum of $150,000 in capital expenditures over the next
twelve months. The Company expects that available cash, cash flows from
operations and proceeds from sales of certain oil and gas properties will be
sufficient to fund the planned capital expenditures through 1999.
Because future cash flows are subject to a number of variables, such
as, the level of production and prices received for oil and gas and the prices
received on property sales, there can be no assurance that the Company's capital
resources will be sufficient to maintain planned levels of capital expenditures
and accordingly, oil and gas revenues and operating results may be adversely
affected.
YEAR 2000 COMPLIANCE
Readers are cautioned that the forward-looking statements contained in
the following Year 2000 discussion should be read in conjunction with the
Company's disclosures under the heading "Forward-Looking Statements." The
disclosures also constitute a "Year 2000 Readiness Disclosure" and "Year 2000
Statement" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
II-7
<PAGE>
STATEMENT OF READINESS
The Company has undertaken various initiatives to ensure that its
hardware, software and equipment will function properly with respect to dates
before and after January 1, 2000. For this purpose, the phrase "hardware,
software and equipment" includes systems that are commonly thought of as
Information Technology systems ("IT"), as well as those Non-Information
Technology systems ("Non-IT") and equipment which include embedded technology.
IT systems include computer hardware and software and other related systems.
Non-IT systems include certain oil and gas production and field equipment,
gathering systems, office equipment, telephone systems, security systems and
other miscellaneous systems. The Non-IT systems present the greatest readiness
challenge since identification of embedded technology is difficult and because
the Company is, to a great extent, reliant on third parties for Non-IT
compliance.
The Company has formed a Year 2000 ("Y2K") Project team, which is
chaired by its Chief Financial Officer, Frank C. Turner, II. The team includes
corporate staff and representatives from the Company's business units. In
response to the possible risks posed to the Company, the team has developed a
Y2K Plan (the "Plan") which includes guidelines for inventory, assessment,
remediation, testing and contingency planning.
The following categories represent the mission-critical operational
systems of the Company. A "mission-critical system" is a system that is vital to
the successful continuation of a core business activity. An application may be
mission critical if it interfaces with a designated mission-critical system.
Each system has been evaluated by the Company as to (a) the risks to the Company
in the event of the most reasonably likely worst case scenario (the "Worst Case
Scenario"); (b) the status of the Company's remediation plan, if any ("Status");
and (c) the Company's contingency plans, if any ("Contingency Plans").
ACCOUNTING SOFTWARE SYSTEMS. The Company relies solely on the
software accounting packages ("Accounting Packages") to provide management with
various reports that allow managers to determine the cash flow and profitability
of individual properties and of the Company as a whole. Management also relies
on the Accounting Packages to provide financial information necessary to prepare
quarterly and annual financial reports that are sent to the Securities and
Exchange Commission, NASDAQ Stock Market, banks and stockholders. In addition,
the Company relies on the Accounting Packages to process and print checks to be
sent to working and royalty interest owners for their share of the monthly oil
and gas sales, to process and print checks for payment to vendors and to process
and print monthly joint-interest statements to be sent to working interest
owners in Company-operated oil and gas properties. Under a Worst Case Scenario,
all accounting functions would have to be completed manually, significantly
hindering the Company's ability to complete the above-described mission-critical
systems.
Status: The Company has updated its accounting systems. Testing is
scheduled to be completed by April 30, 1999.
Contingency Plans: The Company is currently considering contingency
plans for processing its accounting data. Depending on the
results of the testing phase, contingency plans will be
developed.
CONTROL SYSTEMS AND IMBEDDED TECHNOLOGY. These systems include
the equipment used to produce, monitor, control, sell and record hydrocarbon
production, including all artificial lift equipment, storage, measurement and
control facilities and third-party systems and technology interrelated to the
Company's business. Under a Worst Case Scenario, multiple fields of oil and gas
would lose the ability to account for the amount of hydrocarbon
II-8
<PAGE>
production, temporarily shutting down the field(s) for an extended period of
time until the malfunctioning part(s) could be repaired or replaced which
would adversely affect the Company.
Status: The Company operates two fields that are expected to
account for over 10% of the Company's cash flow for the
year ending December 31, 1999. These fields' production
operations are not affected by Y2K issues.
Contingency Plans: The Company will continue to monitor the
operations at its field locations and develop contingency
planning if an exposure becomes apparent.
THIRD-PARTY SYSTEMS - OIL AND GAS PURCHASERS. The Company
utilizes third-party purchasers to sell the oil and gas produced from the wells
in which it has a working or royalty interest. The Company also depends on
third-party purchasers to remit to the Company its share of the proceeds from
the sales of oil and gas. The Company does not directly sell any oil and gas
produced from the wells in which it has a working or royalty interest and does
not take any oil or gas in kind as an alternative to cash payment. Under a Worst
Case Scenario, multiple major purchasers would be temporarily shut down due to
Y2K issues, materially adversely effecting the Company's revenues.
Status: The Company has two purchasers that are expected to account
for over 10% of its oil and gas revenues for the year
ending December 31, 1999. The Company has obtained
information about these two purchasers and their Y2K
readiness. These purchasers have formal Y2K Plans and are
expected to have all of their non-compliant,
mission-critical systems Y2K compliant by September 30,
1999.
Contingency Plans: The Company continues to monitor the Y2K status of
its major purchasers. Should a purchaser not become Y2K
compliant, the Company will identify alternative purchasers
for its production and, if necessary, temporarily shut-in
production.
THIRD-PARTY SYSTEMS - BANKING. The Company relies on its banks
to deposit checks payable to the Company and credit the checks to the
appropriate accounts. The Company also relies on its banks to credit third-party
accounts for payment. A Worst Case Scenario would occur if the Company's
principal bank is unable to provide certain services for an extended period of
time due to Y2K, causing the Company to be materially adversely affected.
Status: The Company's principal bank currently has a formal Y2K
Plan in effect and anticipates that all non-compliant,
in-house mission-critical systems will be substantially
remediated by December 31, 1998 and substantially completed
by March 31, 1999 for vendor-supported systems. The
Company's principal bank expects to have all of its
non-compliant, mission-critical systems Y2K compliant by
June 30, 1999.
Contingency Plans: The Company intends to have cash on hand
sufficient to cover short-term emergency payments and
payroll. The Company also plans to open accounts with other
institutions in the event its principal bank is unable to
rectify its problems in a timely manner. The Company has no
long-term contingency plans in the event of a system-wide
failure of banking institutions.
II-9
<PAGE>
THIRD-PARTY SYSTEMS - SUPPORT FUNCTIONS. The primary material
support functions provided by third parties are electrical service,
communication service and office space. Under a Worst Case Scenario, all primary
support functions would be hindered in the short term.
Status: All vendors of these services have reported that formal Y2K
remediation plans are in effect and will be substantially
complete by September 30, 1999.
Contingency Plans: Short-term (less than two weeks) interruptions of
services will not materially adversely effect the Company.
The Company will be able to conduct business on a reduced
scale using alternative business methods. Longer-term
interruptions may materially adversely effect the Company.
The Company has no plans sufficient to fully offset the
effect of long-term interruptions.
II-10
<PAGE>
COMPUTER OPERATING SYSTEMS AND APPLICATION SOFTWARE SYSTEMS.
The Company relies solely on its personal computer systems to access the
accounting software package through the Company's computer network. In addition,
certain schedules and databases that are used for critical functions rely on
spreadsheet and work-processing applications that are run on the Company's
personal computer systems.
Status: All systems appear to be Y2K ready.
Contingency Plans: Operations could be performed manually until
non-functioning equipment or software is repaired
or replaced
COSTS OF Y2K COMPLIANCE
The costs incurred by the Company to implement the Plan were not
material to the Company's financial condition or results of operations. The
Company does not expect any future costs related to the Plan to be material to
the Company's financial condition or results of operations.
THE RISKS OF Y2K ISSUES
The Company presently believes that Y2K issues will not pose
significant operational problems. However, if all significant Y2K issues are not
properly identified or assessed, remediation and testing are not effected
timely, the Y2K issues, either individually or in combination, may materially
and adversely impact the Company's results of operations, liquidity and
financial condition or materially and adversely affect its relationships with
its business partners. Additionally, the misrepresentation of compliance by
other entities or the persistent, universal failure of financial, transportation
or other economic systems will likely have a material and adverse impact on the
Company's operations or financial condition for which it cannot adequately
prepare.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements for the years ended December 31,
1998 and 1997 and the independent auditors' reports thereon are included in this
Item. 7.
II-11
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In 1998, the Company made the decision to change its independent
accountants to the independent accountants engaged by Middle Bay. Deloitte and
Touche LLP resigned as independent accountants for the Company on October 19,
1998. The independent accountant's reports on the financial statements of the
Company for the two fiscal years ended December 31, 1996 and December 31, 1997,
did not contain an adverse opinion or a disclaimer of opinion, and the reports
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's fiscal years ending December 31, 1996 and
December 31, 1997, there were no disagreements with Deloitte and Touche LLP on
any matter of accounting principle or practice, financial statement disclosure
or auditing scope or procedure which, if not resolved to the satisfaction of
Deloitte and Touche LLP, would have caused Deloitte and Touche LLP to make a
reference to the subject matter of the disagreements in connection with their
report. During the Company's fiscal years ending December 31, 1996 and 1997,
there did not occur any event listed in paragraphs (a)(1)(v)(A) through (D) of
Regulation S-K, Item 304.
Effective January 21, 1999, the Company engaged KPMG LLP as
independent accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1998. Neither the Company nor any person acting
on behalf of the Company consulted KPMG LLP regarding (I) either the application
of accounting principles to a specified transaction, either complete or
proposed, or the type of opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement (as defined in paragraph (a)(1)(iv) of Regulation S-K, Item 304 and
the related instructions) or a reportable event (as described in paragraph
(a)(1)(v) of Regulation S-K, Item 304).
II-12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
----
<S> <C>
Reports of Independent Auditors......................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.........F-4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997.....................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997.....................................F-7
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1998 and 1997.....................................F-8
Notes to Consolidated Financial Statements...........................F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Enex Resources Corporation
We have audited the accompanying consolidated balance sheet of Enex
Resources Corporation and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Enex
Resources Corporation and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Houston, Texas
March 26, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Enex Resources Corporation
We have audited the accompanying consolidated balance sheet of Enex
Resources Corporation and its subsidiaries as of December 31, 1997, and the
related statements of income, changes in stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We have conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Enex
Resources Corporation and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 25, 1998
F-3
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
<TABLE>
ASSETS 1998 1997
- ------ ---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 33,649 $ 4,244,470
Accounts receivable:
Oil and gas sales 250,763 1,587,400
Joint owners 29,926 144,038
Prepaid expenses and other current assets 20,182 364,382
Deferred tax asset - 133,703
---------------- ----------------
TOTAL CURRENT ASSETS 334,520 6,473,993
---------------- ----------------
PROPERTY:
Oil and gas properties (successful efforts method):
Direct ownership 3,662,353 8,005,331
Derived from investment in managed
limited partnerships - 11,906,965
Furniture, fixtures and other (at cost) 345,919 368,780
---------------- ----------------
4,008,272 20,281,076
Less accumulated depreciation,
depletion and amortization 3,101,968 7,344,892
---------------- ----------------
NET PROPERTY 906,304 12,936,184
---------------- ----------------
OTHER ASSETS:
Preferred Stock-Middle Bay 6,467,610 -
Note receivable-Middle Bay 5,147,548 -
Deferred tax asset 199,879 591,625
---------------- ----------------
TOTAL OTHER ASSETS 11,815,037 591,625
TOTAL ASSETS $ 13,055,861 $ 20,001,802
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 212,514 $ 878,646
----------------- -----------------
TOTAL CURRENT LIABILITIES 212,514 878,646
----------------- -----------------
MINORITY INTEREST - 5,694,983
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
5,000,000 shares authorized;
none issued - -
Common stock, $.05 par value;
10,000,000 shares authorized;
1,804,912 and 1,794,912 shares issued and outstanding at
December 31, 1998 and 1997, respectively 90,246 89,746
Additional paid-in capital 10,807,472 10,727,972
Retained earnings 5,190,576 5,809,733
Less cost of treasury stock:
462,240 and 458,040 shares at December 31, 1998
and 1997, respectively (3,244,947) (3,199,278)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,843,347 13,428,173
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,055,861 $ 20,001,802
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
1998 1997
--------------- ----------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 5,859,712 $ 9,093,316
Gas plant sales 17,733 1,002,326
Gain on sale of assets 1,199,272 923,654
Interest income 294,824 217,645
Other income 22,494 226,658
--------------- ----------------
TOTAL REVENUES 7,394,035 11,463,599
--------------- ----------------
COSTS AND EXPENSES:
General and administrative 2,216,352 2,061,090
Lease operating and other 3,053,584 3,455,717
Gas purchases and
plant operating 58,832 791,403
Production taxes 307,422 527,412
Depreciation, depletion and amortization 1,755,183 1,633,771
Impairment 189,211 -
--------------- ----------------
TOTAL COSTS AND EXPENSES 7,580,584 8,469,393
--------------- ----------------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (186,549) 2,994,206
MINORITY INTEREST (414,888) (1,012,449)
--------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (601,437) 1,981,757
--------------- ----------------
INCOME TAX EXPENSE
Current - -
Deferred 17,720 16,082
--------------- ----------------
INCOME TAX EXPENSE 17,720 16,082
--------------- ----------------
NET INCOME (LOSS) $ (619,157) $ 1,965,675
=============== ================
NET INCOME (LOSS) PER SHARE
BASIC $ (0.46) $ 1.45
=============== ================
DILUTED $ (0.46) $ 1.37
=============== ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 1,342,637 1,351,056
=============== ================
DILUTED 1,342,637 1,437,571
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (619,157) $ 1,965,675
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,755,183 1,633,771
Impairment 189,211 -
Bad debt expense 70,000 -
Deferred income tax expense 17,720 16,082
Stock compensation expense - 207,000
Gain on sale of Consolidated Partnership (124,918) -
Gain on sale of properties (1,074,354) (923,654)
Minority interest share of net income (loss) after distributions (862,580) (402,893)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease in accounts receivable 928,090 180,213
Increase in prepaid expenses and other assets (28,370) (91,988)
Decrease in accounts payable (331,430) (65,190)
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (80,605) 2,519,016
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of properties 2,469,850 1,639,855
Cash distributed in sale of the Consolidated Partnership (1,136,431) -
Cash advances to Middle Bay (5,147,548) -
Property additions (350,418) (758,585)
--------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (4,164,547) 881,270
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (45,669) (1,375,637)
Proceeds from exercise of stock options 80,000 398,750
Payment of cash dividend - (530,652)
--------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES 34,331 (1,507,539)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,210,821) 1,892,747
INCREASE IN CASH FROM RECOGNITION OF MINORITY INTEREST - 331,649
INCREASE IN CASH FROM CONVERSION OF RECEIVABLE TO LIMITED PARTNER UNITS - 157,793
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,244,470 1,862,281
--------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 33,649 $ 4,244,470
=============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ - $ -
Income taxes $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Receipt of preferred stock of Middle Bay in exchange for
Consolidated Partnership units $ 6,467,610 $ -
Conversion of receivable to limited partner units - $ 2,420,858
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
Common Stock
------------------------ Additional
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
----------- ---------- --------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 1,684,412 $ 84,221 $10,127,747 $ 4,374,710 $ (1,823,641) $12,763,037
Exercise of stock options 110,500 5,525 393,225 398,750
Stock options granted 207,000 207,000
Purchase of 131,500 shares
of treasury stock (1,375,637) (1,375,637)
Payment of $.40 per share
cash dividend (530,652) (530,652)
Net income 1,965,675 1,965,675
----------- ---------- --------------- ---------------- -------------- --------------
BALANCE,
DECEMBER 31, 1997 1,794,912 89,746 10,727,972 5,809,733 (3,199,278) 13,428,173
Exercise of stock options 10,000 500 79,500 80,000
Purchase of 4,200 shares
of treasury stock (45,669) (45,669)
Net loss (619,157) (619,157)
----------- ---------- --------------- ---------------- -------------- --------------
BALANCE,
DECEMBER 31, 1998 1,804,912 $90,246 $10,807,472 $5,190,576 ($3,244,947) $12,843,347
=========== ========== =============== ================ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Enex Resources Corporation (the Company) was incorporated under the
laws of the state of Colorado on August 17, 1979. On June 30, 1992, the Company
reincorporated in Delaware. Effective March 27, 1998, Middle Bay Oil Company,
Inc. ("Middle Bay") acquired 79.2% of the common stock of the Company. Effective
October 1, 1998, the Company sold all of its partnership units in Enex
Consolidated Partners, L.P. (the "Consolidated Partnership"), a limited
partnership of which the Company owned greater than a 50% interest, to Middle
Bay. The Company is engaged in the acquisition, development and production of
oil and natural gas in the contiguous United States. The Company considers its
business to be a single operating segment.
The Consolidated Partnership was formed from thirty-four managed
limited partnerships effective June 30, 1997 (the "Consolidation") The Company
had a 4.1% carried revenue interest as general partner in addition to its
proportional interest as a limited partner of approximately 56.2%.
SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect industry standards and
conform to generally accepted accounting principles. The more significant of
such policies are described below.
PRINCIPLES OF CONSOLIDATION
In 1998, the consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Enex Securities Corporation and
until September 30, 1998, the accounts of the Consolidated Partnership. In 1997,
the financial statements include the accounts of the Company, its wholly owned
subsidiaries, Enex Securities Corporation and Gulf-Tex Maintenance Corporation
and the Consolidated Partnership and until June 30, 1997, the Company's pro rata
share of the assets, liabilities, revenues and expenses of the managed limited
partnerships in which it participated as the general partner. The equity of
minority partners in the Consolidated Partnership was shown in the financial
statements as "minority interest". All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company classifies
all cash investments with original maturities of three months or less as cash.
F-9
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ACCOUNTS RECEIVABLE-JOINT OWNERS
The Company, as operator for jointly-owned properties, bills joint
owners monthly for cost expended by the Company for the joint owners' share of
operating costs and capital expenditures.
OIL AND GAS PROPERTY
The Company follows the successful efforts method of accounting for oil
and gas properties, and accordingly, capitalizes all direct costs incurred in
connection with the acquisition, drilling and development of productive oil and
gas properties. Costs associated with unsuccessful exploration are charged to
expense currently. Geological and geophysical costs and costs of carrying and
retaining unevaluated properties are charged to expense. Depletion, depreciation
and amortization of capitalized costs are computed separately for each property
based on the unit of production method using only proved oil and gas reserves.
In arriving at such rates, commercially recoverable reserves have been estimated
by independent petroleum engineering firms. The Company reviews its undeveloped
properties continually and charges them to expense on a property by property
basis when it is determined that they have been condemned by dry holes, or will
not be retained, sold or drilled upon. Gains and losses are recorded on sales of
entire interests in proved or unproved properties. For the years ended December
31, 1998 and 1997, the Company realized gains on sales of properties of
$1,074,000 and $924,000, respectively. The Company has not capitalized any
internal costs into property.
The Company reviews long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such an asset may
not be recoverable. This review consists of a comparison of the carrying value
of the asset to the asset's expected future undiscounted cash flows without
interest costs. Estimates of expected future cash flows represent management's
best estimate based on reasonable and supportable assumptions and projections.
If the expected future cash flows, assuming escalated prices, are less than the
carrying value of the asset, an impairment exists and is measured as the excess
of the carrying value over the estimated fair value of the asset. The Company
estimates discounted future net cash flows to determine fair value. Any
impairment provisions recognized are permanent and may not be restored in the
future.
The Company's proved properties were assessed for impairment on an
individual field basis and the Company recorded an impairment provision in 1998
of $189,000. No impairment provision was recorded in 1997.
F-10
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
MANAGED LIMITED PARTNERSHIPS
For the nine months ended September 30, 1998 and for the six months
ended December 31, 1997, the Company served as general partner of the
Consolidated Partnership and also participated as a limited partner. For the six
months ended June 30, 1997, the Company served as general partner for 39
publicly offered limited partnerships of Enex Program I Partners, L.P., Enex Oil
and Gas Income Programs II, III, IV, V and VI, Enex Income and Retirement Fund,
Enex 88-89 Income and Retirement Fund, and Enex 90-91 Income and Retirement
Fund.
As general partner of the Consolidated Partnership, the Company was
entitled to 4.1% of the Consolidated Partnership's oil and gas revenues less
4.1% of the expenses, other than the costs of acquiring oil and gas properties.
The Company recognized its share of these net revenues as production was sold to
third parties.
In addition to the above, the Company was reimbursed for direct
expenditures made on behalf of the partnership operations. Overhead billed to
the managed limited partnerships, which was treated as a reduction of general
and administrative expenses prior to the Consolidation, was $1,103,000 for the
six months ended June 30, 1997. General and administrative expenses for the six
months ended December 31, 1997 billed to the managed limited partnerships
reduced minority interest share of net income by $228,000.
OTHER PROPERTY AND EQUIPMENT
Other property and equipment are stated at cost and depreciation is
computed on the straight-line method over appropriate lives not to exceed five
years. Additions and betterments which provide benefits to several periods are
capitalized.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current or future revenues
are expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations are expensed. Liabilities are
recorded when environmental assessments and/or clean-ups are probable, and the
costs can be reasonably estimated. Generally, the timing of these accruals
coincides with the Company's commitment to a formal plan of action.
REVENUE
Oil and gas revenues are recorded using the sales method, whereby the
Company recognizes revenues based on the amount of oil and gas sold to
purchasers on its behalf. The revenue imbalance for 1998 and 1997 was
immaterial.
F-11
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes under which deferred tax assets and liabilities are determined by
applying enacted statutory tax rates applicable to future years to the
difference between the financial statement and tax basis of assets and
liabilities. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized as part of the provision for income taxes in the period
that includes the enactment date.
STOCK BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock Based Compensation", which establishes financial
accounting and reporting standards for stock based compensation plans. The
statement provides the option to continue under the accounting provisions of APB
Opinion No. 25, while requiring proforma footnote disclosures of the effects of
net income and earnings per share, calculated as if the new method had been
implemented. The Company adopted the financial reporting provisions of SFAS No.
123, but continues under the accounting provisions of APB Opinion No. 25.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all potential common shares, including options, warrants
and convertible preferred stock.
CONCENTRATIONS OF MARKET RISK
The future results of the Company will be affected by the market prices
of oil and natural gas. The availability of a ready market for natural gas and
oil in the future will depend on numerous factors beyond the control of the
Company, including weather, production of other natural gas and crude oil,
imports, marketing of competitive fuels, proximity and capacity of oil and gas
pipelines and other transportation facilities, any oversupply or undersupply of
gas and oil, the regulatory environment, and other regional and political
events, none of which can be predicted with certainty.
F-12
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash investments with high credit qualified financial institutions.
Risk with respect to receivables is concentrated primarily in the current
production revenue receivable from multiple oil and gas producers, both major
and independent, and is typical in the industry. No single customer accounted
for greater than 10% of the Company's total oil and gas sales for the years
ended December 31, 1998 and 1997.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for and disclosures of derivative instruments, including certain derivative
instruments embedded in other contracts. The statement is effective for
financial statements for periods beginning after June 15, 1999. As the Company
historically has not entered into derivative instruments for non-trading
(hedging) purposes or for trading purposes, the Company does not expect this
statement to have a material impact on its financial condition or results of
operations upon implementation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare the
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to
conform to the current presentation.
F-13
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) CONSOLIDATED PARTNERSHIP DIVESTITURE AND RECEIPT OF PREFERRED STOCK OF
MIDDLE BAY
On December 29, 1998, the Company sold all of its units of the
Consolidated Partnership to Middle Bay. The sale consisted of an exchange offer
(the "Exchange Offer") whereby the Company exchanged each Consolidated
Partnership unit for 2.086 shares of Middle Bay Series C Preferred Stock
("Middle Bay Preferred Stock"). In connection with the Exchange Offer, a
proposal was submitted to the limited partners in the Consolidated Partnership
to amend the partnership agreement to provide for the transfer of all of the
assets and liabilities of the Consolidated Partnership to Middle Bay as of
October 1, 1998 and dissolve the Consolidated Partnership. The Exchange Offer
was approved on December 29, 1998 and 2,177,481 shares of Middle Bay Preferred
Stock were issued for 100% of the outstanding limited partner units. The Company
was issued 1,293,522 shares of Middle Bay Preferred Stock for its limited
partner ownership in the Consolidated Partnership.
As a holder of Series C the Company is entitled to receive cumulative
cash dividends in an amount per share of $0.50 per year (10% annual rate),
payable semi-annually on March 31 and September 30 of each year. These dividends
are payable in preference to and prior to the payment of any dividend or
distribution to any holder of Middle Bay common stock or other junior security.
The Series C dividends began to accrue on December 30, 1998. Middle Bay's
primary bank has granted Middle Bay a waiver allowing it to pay the dividends on
the Series C as long as no default or event of default exists or would exist as
a result of any Series C dividend payment. The Series C has a liquidation
preference of $5.00 per share plus an amount equal to all accumulated, accrued
and unpaid dividends. The liquidation preference of Series C ranks on parity
with Middle Bay's Series B Preferred Stock outstanding. As of December 31, 1998,
Middle Bay had no other preferred stock outstanding.
Each share of Series C is convertible into one share of Middle Bay
common stock. On or after January 1, 2000, Middle Bay may redeem all or a
portion of the Series C, at its option, at a purchase price of $5.00 per share,
plus an amount equal to all accumulated, accrued and unpaid dividends.
The Series C is generally nonvoting; however, holders of Series C are
entitled to vote on any amendment, alteration or appeal of any provision of
Middle Bay's Articles of Incorporation which would adversely affect any holder's
rights and preferences.
F-14
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) CONSOLIDATED PARTNERSHIP DIVESTITURE AND RECEIPT OF PREFERRED STOCK OF
MIDDLE BAY (continued)
The following pro forma data presents the results of the Company for
the twelve months ended December 31, 1998 and 1997, as if the divestiture of the
Consolidated Partnership had occurred on January 1, 1997. The pro forma results
are presented for comparative purposes only and are not necessarily indicative
of the results which would have been obtained had the divestiture been
consummated as presented. Dollars are presented in thousands, except for per
share amounts.
<TABLE>
ProForma
(Unaudited)
1998 1997
---- ----
<C> <C> <C>
Total revenues excluding dividend income $1,738 $2,417
Preferred dividend income 647 647
Net income (loss) available to stockholders (604) 908
Net income (loss) per share available to stockholders (0.45) 0.67
</TABLE>
(3) MIDDLE BAY TENDER OFFER
On March 27, 1998, Middle Bay purchased 1,064,432 of the outstanding
common shares of the Company for $15,966,480. Middle Bay purchased the common
shares through a cash tender offer that commenced February 19, 1998. Over the
three-week period ended December 23, 1998, Middle Bay acquired an additional
9,747 shares (approximately 0.80%) of the outstanding common shares of the
Company.
(4) RELATED PARTY TRANSACTIONS
The Company has a note receivable from Middle Bay, an owner of 80% of
the outstanding common stock of the Company, as of December 31, 1998 of
$5,148,000. The principal balance of the note accrues interest at the prime rate
and is due on demand. The note consists of advances to Middle Bay for general
corporate purposes and is unsecured. Interest of $227,000 was accrued on the
note as of December 31, 1998.
Middle Bay financed its tender offer with cash provided by Compass Bank
and Bank of Oklahoma (the "Banks"). The debt proceeds used to finance the tender
offer, approximately $15.9 million, was shown on the balance sheet of Middle
Bay. Pursuant to the terms of the credit agreement between Middle Bay, the
Company and the Banks, the Banks hold a security interest in certain oil and gas
properties of the Company. If certain properties are sold by the Company an
amount determined by the Banks would have to be paid on the outstanding
principal balance of the debt. The debt payment could be made by Middle Bay
F-15
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(4) RELATED PARTY TRANSACTIONS (continued)
or the Company. Amounts paid to the Banks by the Company would reduce the amount
of sales proceeds the Company would retain. Amounts paid to the Banks by Middle
Bay would reduce the amount of cash available to be paid to the Company. The
principal balance of debt outstanding on Middle Bay's financial statements at
December 31, 1998 was approximately $27.5 million.
All of the officers and directors of the Company also serve as the
officers and directors of Middle Bay.
(5) INCOME TAXES
Income tax expense for the years ended December 31 consisted of the
following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Current $ ---- $ ----
Deferred 17,720 16,082
------------- ------------
Total $ 17,720 $ 16,082
============= ============
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory
tax rates to the provision for income taxes is as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Income tax (benefit) expense at statutory rate $ (204,489) $ 673,797
Increase (decrease) in valuation allowance 222,209 (727,041)
Nondeductible stock option expense --- 70,380
Decrease due to other items --- (1,054)
------------- -------------
Income tax expense $ 17,720 $ 16,082
============= =============
</TABLE>
F-16
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) INCOME TAXES (continued)
The Company's net deferred tax asset at December 31, 1998 and 1997 is
as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability
Other ---- 63,952
Deferred tax assets
Oil and gas properties (595,120) (5,080,936)
NOL carryforward (1,454,218) (1,015,224)
Other (168,075) (72,940)
------------- -----------
(2,217,413) (6,169,100)
Valuation allowance 2,017,534 5,379,820
------------- -----------
Net deferred tax asset $ (199,879) $ (725,328)
============= ===========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon projections for
future taxable income over the periods which the deferred tax assets are
deductible and the Section 382 limitation discussed below, management
believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1998 and 1997. The valuation allowance decreased
$3,362,286 during 1998 and increased $727,041 during 1997. The 1998 decrease
in the valuation allowance includes approximately $3,140,000 attributable to
the disposition of the Consolidated Partnership.
In March 1998, 79.2% of the Company's common stock was acquired by
Middle Bay, at which time the Company had a net operating loss carryforward of
approximately $5,200,000. These net operating losses expire in varying amounts
through 2012, and their utilization is limited due to an ownership change
pursuant to Section 382 triggered by Middle Bay's acquisition of the Company's
common stock.
As of December 31, 1998, the Company had net operating loss
carryforwards of approximately $4,280,000, which expire through the year 2018.
(6) STOCK OPTION PLANS
At December 31, 1998, the Company had an incentive stock option plan and a
nonqualified stock option plan, which authorize the issuance of options to
purchase up to 362,000 shares of common stock to directors, officers and key
employees. The Company has also issued options not covered by a plan. The
Company applies the intrinsic value method for accounting for stock based
compensation in accordance
F-17
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(6) STOCK OPTION PLANS (continued)
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations; accordingly, $207,000 of compensation expense was recognized in
the first quarter of 1997 for certain options that were issued at an exercise
price that was less than the market price of the Company's common stock at the
date of grant. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for stock options granted
during 1997, the Company's net income and income per share would have been
decreased to the pro forma amounts listed below:
<TABLE>
<CAPTION>
1997
----
<S> <C> <C>
Net income As Reported $ 1,965,675
Pro Forma 1,644,963
Basic income As Reported $ 1.45
Pro Forma 1.21
Diluted income As Reported $ 1.37
Pro Forma 1.13
</TABLE>
The weighted average fair value of stock options granted during 1997
was $1.99 per share. The fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for the grants in 1997; 3% dividend yield; expected volatility
of 15%; weighted average risk-free interest rate of 6.50%; and expected life of
10 years. No stock options were granted during 1998.
In conjunction with the tender offer by Middle Bay, the Company paid to
the option holders at the tender offer date the difference between the tender
offer price of $15 and the exercise price of the options and retired the
options. Options to acquire 143,000 shares of Company common stock were
purchased in conjunction with the tender offer for $826,250 which was recorded
as general and administrative expense.
F-18
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(6) STOCK OPTION PLANS (continued)
At December 31, 1998 there were 209,000 shares of common stock
available for grant under the stock option plans. The plans are administered by
the Compensation Committee of the Board of Directors.
Information relating to stock options is summarized below:
<TABLE>
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
Options outstanding at January 1, 1997.................... 163,500 $4.95
Granted ................................................. 125,000 $9.88
Expired................................................... (36,000) $3.75
Renewed................................................... 36,000 $3.75
Exercised................................................. (110,500) $3.62
--------
Options outstanding at December 31, 1997.................. 178,000 $9.25
Buyout ................................................... (143,000) $9.22
Canceled ................................................. (25,000) $9.88
Exercised................................................. (10,000) $8.00
--------
Options outstanding at December 31, 1998.................. ----
====
</TABLE>
(7) STOCKHOLDERS EQUITY
EARNINGS PER SHARE
The following table provides a reconciliation between basic and diluted
earnings (loss) per share:
<TABLE>
WEIGHT AVERAGE PER
COMMON SHARES SHARE
NET EARNINGS (LOSS) OUTSTANDING AMOUNT
------------------- -------------- -------
<S> <C> <C> <C>
Year Ended December 31, 1998:
Basic loss per share $ (619,157) 1,342,637 $ (0.46)
Effect of dilutive stock options --- --- ---
Diluted loss per share $ (619,157) 1,342,637 $ (0.46)
Year Ended December 31, 1997:
Basic earnings per share $ 1,965,675 1,351,056 $ 1.45
Effect of dilutive stock options --- 86,515 .08
Diluted earnings per share $ 1,965,675 1,437,571 $ 1.37
</TABLE>
At December 31, 1998 the Company had no common stock equivalents
outstanding.
F-19
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(8) COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company had $550,432 of irrevocable
standby letters of credit outstanding.
At June 30, 1997, the Company was committed to offer to repurchase the
limited partners' interest in certain of its managed limited partnerships at
annual intervals. The purchase price was based primarily on reserve reports
prepared by independent petroleum engineers, reduced by a risk factor.
Generally, for the first three annual purchase offers after the formation of a
partnership, the Company's annual repurchase obligation was limited to the
lesser of 10% to 25% of initial partnership subscriptions or $1,000,000 per
partnership. Effective June 30, 1997, the Company was committed to offer to
purchase the limited partners' interests in the Consolidated Partnership at
annual intervals. As of December 31, 1997, such commitments totaled $5,115,761.
For the nine months ended September 30, 1998 and for the year ended
December 31, 1997, the Company paid $94,478 and $569,792, respectively, to
repurchase limited partner interests. Due to the sale of all of its units in the
Consolidated Partnership effective October 1, 1998 and the dissolution of the
Consolidated Partnership, the Company is no longer committed to repurchase any
limited partner units in the Consolidated Partnership.
The Company is a defendant in various legal proceedings which are
considered routine litigation incidental to the Company's business, the
disposition of which management believes will not have a material effect on the
financial position or results of operations of the Company.
F-20
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
CAPITALIZED COSTS AND COSTS INCURRED
The following tables present the capitalized costs related to oil and
gas producing activities and the related depreciation, depletion, amortization
and impairment and costs incurred in oil and gas property acquisition,
exploration and development activities (in thousands):
<TABLE>
1998 1997
---- ----
<S> <C> <C>
CAPITALIZED COSTS
Proved properties $ 3,662 $ 19,912
Accumulated depreciation, depletion, amortization
and impairment (2,798) (7,032)
----------- -----------
Net capitalized costs $ 864 $ 12,880
=========== ===========
COSTS INCURRED
Proved properties $ --- $ 346
Development costs 350 412
----------- -----------
Total $ 350 $ 758
=========== ===========
Depletion, depreciation, amortization
and impairment $ 1,929 $ 1,605
=========== ===========
</TABLE>
ESTIMATED QUANTITIES OF RESERVES
The Company has interests in oil and gas properties that are located
principally in Texas. The Company does not own or lease any oil and gas
properties outside the United States. There are no quantities of oil and gas
subject to long-term supply or similar agreements with any governmental
agencies.
The Company retains independent engineering firms to provide year-end
estimates of the Company's future net recoverable oil, gas and natural gas
liquids reserves. In 1998, such estimates were prepared by H.J. Gruy &
Associates, Inc. and Lee Keeling & Associates, Inc. In 1997, such estimates were
prepared by and H.J. Gruy & Associates, Inc. and company personnel. The reserve
information was prepared in accordance with guidelines established by the
Securities and Exchange Commission.
F-21
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (continued)
ESTIMATED QUANTITIES OF RESERVES (continued)
Estimated proved net recoverable reserves as shown below include only
those quantities that can be expected to be commercially recoverable at prices
and costs in effect at the balance sheet dates under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells. Proved undeveloped reserves include those reserves
expected to be recovered from new wells or on undrilled acreage or from existing
wells on which a relatively major expenditure is required for recompletion.
The sale of reserves in place includes the sale of the reserves
attributable to the Consolidated Partnership discussed in Note 2. At December
31, 1998, the reserves shown are only the reserves directly owned by the
Company.
Net quantities of proved developed and undeveloped reserves of natural
gas and crude oil, including condensate and natural gas liquids, are summarized
as follows:
<TABLE>
Years Ended
December 31
1998 1997
---- ----
OIL GAS OIL GAS
PROVED RESERVES (BARRELS) (MCF) (BARRELS) (MCF)
- --------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Beginning of year 1,299,556 14,915,559 811,930 12,980,903
Revisions of previous estimates (258,651) 5,734,679 49,386 (948,061)
Additions from minority interest 456,027 2,617,242
Purchases of reserves in place --- --- 364,252 2,321,700
Sale of reserves in place (752,704) (9,926,321) (104,810) (320,521)
Production for the year (227,976) (1,461,306) (277,229) (1,735,704)
--------- ---------- --------- ----------
End of year 60,225 9,262,611 1,299,556 14,915,559
========= ========== ========= ==========
Minority interest in proved reserves --- --- 490, 745 4,727,790
========= ========== ========= ==========
PROVED DEVELOPED RESERVES
Beginning of year 1,299,556 14,915,559 745,998 12,980,903
End of year 60,225 6,865,911 1,299,556 14,915,559
Minority interest in proved
developed reserves --- --- 490, 745 4,727,790
========= ========== ========= ==========
</TABLE>
F-22
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (continued)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES
The following is a summary of the standardized measure of discounted
future net cash flows related to the Company's proved oil and gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves are computed using oil and gas prices as of the end of each
period presented. Future development and production costs attributable to the
proved reserves were estimated assuming that existing conditions would continue
over the economic lives of the individual leases and costs were not escalated
for the future. Estimated future income taxes were calculated by applying
statutory tax rates (based on current law adjusted for permanent differences and
tax credits) to the estimated future pre-tax net cash flows related to proved
oil and gas reserves, less the tax basis of the properties involved.
The Company cautions against using this data to determine the value of
its oil and gas properties. To obtain the best estimate of the fair value of the
oil and gas properties, forecasts of future economic conditions, varying
discount rates, and consideration of other than proved reserves would have to be
incorporated into the calculation. In addition, there are significant
uncertainties inherent in estimating quantities of proved reserves and in
projecting rates of production that impair the usefulness of the data.
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31
1998 1997
---- ----
<S> <C> <C>
Future cash inflows $ 20,352 $ 53,706
Future production costs and development costs ( 11,884) (19,580)
Future income tax expenses (338) ---
------------ ------------
Future net cash flows 8,130 34,126
10% discount to reflect timing of cash flows (4,400) (13,946)
------------ --------
Standardized measure of discounted
future net cash flows $ 3,730 $ 20,180
=========== ============
</TABLE>
F-23
<PAGE>
ENEX RESOURCES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (continued)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES
(continued)
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31
1998 1997
---- ----
<S> <C> <C>
Sales of oil and gas, net of production cost $ ( 2,490) $( 5,133)
Net changes in price and production cost ( 3,048) (12,778)
Purchase of reserves --- 3,994
Sale of reserves (12,080) (1,000)
Revisions of previous quantity estimates 1,547 (573)
Increase in reserves due to consolidation of
managed limited partnerships --- 4,783
Net change in income taxes (174) 4,309
Accretion of discount 2,018 2,841
Changes in production rates (timing) and other (2,223) (367)
------- -----
Change in standardized measure of
discounted future net cash flows $ (16,450) $ (3,924)
========== ==========
</TABLE>
During recent years, there have been significant fluctuations in the
prices paid for crude oil in the world markets. The situation has had a
destabilizing effect on the crude oil posted prices in the United States,
including the posted prices paid by purchasers of the Company's crude oil. The
year end prices of oil and gas at December 31, 1998 and 1997, used in the above
table were $9.50 and $16.18 per barrel of oil and $2.10 and $2.54 per thousand
cubic feet of gas, respectively.
F-24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Prior to the tender offer by Middle Bay and the acquisition of
approximately 79% of the Company's outstanding common stock, the directors
and executive officers of the Company were Gerald B. Eckley, Wiliam C.
Hooper, Jr., Stuart Strasner, Martin J. Freedman, James T. Shorney, and
Robert D. Carl III. Subsequent to the tender offer, the directors and
officers of Middle Bay replaced the previous directors and officers of the
Company.
The following table sets forth the executive officers and directors
of the Company as of December 31, 1998. All directors serve for a one-year
term or until the next Annual Meeting of Shareholders of the Company. The
Board of Directors held two meetings during the fiscal year ended December 31,
1998. Executive officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Director
Name Age Position(s) Held Since
---- --- ---------------- -----
<S> <C> <C> <C>
John J. Bassett 40 Chairman, President and 1998
Chief Executive Officer
C. J. Lett, III 41 Executive Vice President 1998
Frank C. Turner, II (1) 38 Vice President and Chief N/A
Financial Officer
Stephen W. Herod 39 Vice President 1998
Robert W. Hammons 45 Vice President N/A
Edward P. Turner, Jr. (1) 69 Director 1998
Frank E. Bolling, Jr. 39 Director 1998
Alvin V. Shoemaker 60 Director 1998
Gary R. Christopher 49 Director 1998
</TABLE>
(1) Edward P. Turner, Jr. and Frank C. Turner, II, are father and son.
JOHN J. BASSETT has served as President, Chief Executive Officer and
a director of Middle Bay and since 1992 and was elected Chairman of the Board
of Directors in 1992. From 1987 to 1992, he served as President of the
general partner of the partnership that was consolidated into Middle Bay.
Mr. Bassett was
III-1
<PAGE>
a director and President of Bay City Energy Group, Inc., a principal
shareholder of the Company, from 1987 to 1996.
STEPHEN W. HEROD has served as Vice President - Corporate
Development and a director of Middle Bay since July 1, 1997. Mr. Herod served
as President and a director of Shore Oil Company from April 1992 until the
merger of Shore and Middle Bay on June 30, 1997. He joined Shore's
predecessor as Controller in February 1991. In addition, Mr. Herod was
employed by Conquest Exploration Company from 1984 until 1991 in various
financial management positions, including Operations Accounting Manager. From
1981 to 1984, Superior Oil Company employed Mr. Herod as a financial analyst.
FRANK C. TURNER, II has served as Vice President and Chief Financial
Officer for Middle Bay since its organization as a corporation in 1992. Since
1990, he served as Vice President of Finance for the general partner of the
partnership that consolidated into Middle Bay. From 1987 to 1990, Mr. Turner
was employed by Sonat, Inc. as a financial analyst. He also serves as a
director and Vice President of Bay City Energy Group, Inc.
ROBERT W. HAMMONS was hired by Middle Bay in April, 1992 as a
reservoir engineer. Mr. Hammons was appointed Vice President of Engineering
of Middle Bay in 1993. Prior to his employment with Middle Bay, he had worked
with Bay City Minerals, Inc. as an independent petroleum engineering
consultant since 1987. Prior to 1987, Mr. Hammons was employed as manager of
reservoir engineering for Marion Corporation.
EDWARD P. TURNER, JR. served as President of Bay City Minerals, Inc.
from 1975 to 1987. He is a member of the Alabama State Bar and a managing
partner of the law firm of Turner, Onderdonk, Kimbrough & Howell, P.A., in
Chatom, Alabama. A substantial amount of his practice is devoted to oil and
gas law. Mr. Turner also serves as a director of Bay City Energy Group, Inc.
FRANK E. BOLLING, JR. has been employed by Midstream Fuel
Services, Inc. as Vice President of Retail Operations since February, 1995.
Prior to his employment with Midstream, Mr. Bolling served as Vice President
and General Manager of Dantzler Bulk Plant, Inc., a distributor for Chevron
U.S.A., Inc. with annual sales in excess of $25 million. Mr. Bolling served
as sales manager for Dantzler from 1987 to 1989. Prior to 1987, Mr. Bolling
was employed by Bay City Minerals, Inc.
ALVIN V. SHOEMAKER is a former Chairman of the Board of First Boston
Corporation and former President of Blyth Eastman Paine Webber. He has also
worked for the U.S. Treasury. He has been Chairman of the Board of Trustees
of the University of Pennsylvania, Vice Chairman of the Securities Industry
Association and a director of Harcourt Brace Jovanovich, Royal Insurance of
America, Hanover Compressor Company, the Council on Foreign Relations and the
Wharton School of Finance Board.
GARY R. CHRISTOPHER is Acquisitions Coordinator of Kaiser-Francis
Oil Company, a position he has held since February 1996. From 1991 to 1996,
Mr. Christopher served as Senior Vice President and
III-2
<PAGE>
Manager of Energy Lending for the Bank of Oklahoma. He continues to serve as
a consultant to the Bank of Oklahoma. Kaiser-Francis Oil Company owns
3,333,334 shares of the Company's common stock.
C. J. LETT, III has served as Executive Vice President and a
director for Middle Bay since the merger of Middle Bay and Bison Energy
Corporation on February 28, 1997. Mr. Lett was President and a director of
Bison Energy Corporation from 1981 to 1997.
(b) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and any persons who own more than
10% of the Company's common stock to file with the Securities and Exchange
Commission reports of ownership and changes in ownership of such securities.
None of the directors and executive officers owned any Company common stock
during 1998. The Company has no knowledge of whether FMR has timely filed all
required filings under Section 16(a) with regard to the Company's common
stock during 1998.
ITEM 10. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The table below presents information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal
years ended December 31, 1996, 1997 and 1998, of those persons who were
(I) the chief executive officer and (ii) the other executive officers of the
Company (the "Named Officers") who earned at least $100,000 during the fiscal
year ended December 31, 1998. None of the officers of Middle Bay that were
appointed officers of the Company were paid any compensation by the Company
during the period ended December 31, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
Shares All
Name and Underlying Other
Principal Position Year Salary Bonus Options Compensation
- ------------------ ---- -------- ------- ---------- ------------
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald B. Eckley 1998 $110,000 $--- --- $198,125 (4)
President (1) 1997 $240,000 $54,984 25,000 $370,000 (2)
1996 $240,000 $53,000 - 0 - $ 23,368 (3)
James A. Klein 1998 $ 46,586 $--- --- $163,125 (4)
Controller (1) 1997 $ 71,167 $33,874 25,000 $ 76,875 (2)
- ------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Eckley resigned on June 15, 1998 and Mr Klein resigned on July 1,
1998.
III-3
<PAGE>
(2) The amounts shown represent the value realized upon the exercise of
options to purchase Company common stock.
(3) The amounts shown represent the aggregate value of monthly
contributions of shares of the Company's common stock equal to 50% of a
participant's open market purchases of the Company's common stock for
the preceding month (limited to a maximum of 2,500 shares per
participant per year) pursuant to the Company's Employee Stock Purchase
Program (the "Program"). All officers, directors and full-time
employees were eligible to participate in the Program until it was
terminated in 1996.
(4) The long term compensation in 1998 represents the buyout, in connection
with the Middle Bay tender offer, of the options granted to certain
employees. The buyout was the difference between the tender offer price
of $15 and the exercise price of the options multiplied by the number
of options outstanding for each employee.
(b) OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to any executive officer or director of the
Company during the year ended December 31, 1998.
(c) AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUE TABLE AS
OF DECEMBER 31, 1998
No executive officer or director of the Company exercised any options or
held any unexercised options at December 31, 1998.
(d) COMPENSATION OF DIRECTORS
In 1998, in conjunction with the tender offer by Middle Bay, each
nonemployee director that was replaced with Middle Bay's directors, received
a cash payment equal to the difference between the tender offer price of $15
per share and the exercise prices of the options owned multiplied by the
number of shares under option. Each nonemployee director, except William C.
Hooper who received $120,000, received payments of $86,250.
Each nonemployee director that was replaced with Middle Bay's directors,
received $1,200 as compensation for each meeting which he attended in person
and $1,800 per calendar quarter.
(e) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENT
III-4
<PAGE>
In conjunction with the tender offer by Middle Bay, the employment
agreement between the Company and Mr. Eckley was replaced with a consulting
agreement between Middle Bay and Mr. Eckley. Middle Bay entered into a
consulting agreement, effective April 15, 1998, with Mr. Eckley that provides
for monthly payments of $20,000 until expiration of the agreement on May 18,
2002. The monthly payments serve as consideration for consulting, a covenant
not to compete and a preferential right to purchase certain oil and gas
acquisitions which the former president controls or proposes to acquire
during the term of the agreement. Middle Bay will reimburse Mr. Eckley each
month for reasonable and necessary business expenses incurred in connection
with the performance of consulting services. The agreement survives Mr. Eckley
and his spouse and is nonassignable.
The employment agreement between the Company and Mr. Eckley, the former
president of the Company, provided for a minimum salary of $200,000 per year
for a five-year term beginning each May 19. Salary increases were at the
discretion of the Board of Directors. Mr. Eckley's base salary was $240,000
in 1997. So long as Mr. Eckley was employed by the Company, the agreement
would be automatically extended for an additional year every May 19 unless
Mr. Eckley or the Board elected to terminate the automatic extension feature.
The agreement provided for compensation continuation benefits in the event of
Mr. Eckley's death or disability. If Mr. Eckley terminated the agreement
following a change of control of the Company, for a breach of the material
provisions of the agreement or because performance of his duties becomes
hazardous to his health, he would remain entitled to the full base
compensation then in effect, as severance pay, until the expiration of the
agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the shares of the Company's common stock
beneficially owned by those persons known by the Company to be the
beneficial owner of more than five percent of the Company's issued and
outstanding common stock as of December 31, 1998:
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
-------- ---------------- -------------------- ----------
<S> <C> <C> <C>
Common Middle Bay Oil Co., Inc. (1) 1,074,179 80.0%
1221 Lamar Street, Ste. 1020
Houston, TX 77010
Common FMR Corp. (2) 144,300 10.7%
82 Devonshire Street
Boston, MA 02109
</TABLE>
(1) On March 27, 1998, Middle Bay acquired 1,064,432 shares of common stock
pursuant to Middle Bay's tender offer which began February 19, 1998.
(2) FMR Corp. ("FMR") is a holding company, one of whose principal assets is
the capital stock of Fidelity Management and Research Company ("Fidelity"),
the investment advisor to a large number of investment companies (the
"Fidelity Funds"), including the Fidelity Low-Priced Stock Fund, which owns
the shares shown in the table. FMR, through its control of Fidelity, and the
Chairman of FMR each has sole power to dispose of such shares. Neither FMR
nor its principal shareholder has the sole power to vote or direct the voting
of such shares, which power
III-5
<PAGE>
resides with the Fidelity Funds' Board of Trustees. Fidelity carries out the
voting of the shares under written guidelines established by the Fidelity
Funds' Board of Trustees. All information regarding FMR was obtained from
Amendment No. 5 to Schedule 13G filed by FMR with the SEC on February 14,
1998.
(b) SECURITY OWNERSHIP OF MANAGEMENT
No officer or director of Enex owns shares in the Company. However,
the officers and directors of Enex own shares in Middle Bay, the majority
owner of Enex. The following table sets forth the shares of Middle Bay's
common stock beneficially owned by each director and executive officer and
all directors and executive officers as a group, all as of March 1, 1999:
<TABLE>
<CAPTION>
Conv. Preferred Name and Address of Amount and Nature of Percent of
& Options Stock Beneficial Owner Beneficial Ownership(6) Class
--------- ----- ---------------- -------------------- ----------
<S> <C> <C> <C> <C>
222,000 25,211 John J. Bassett 247,211 2.5%
4326 Noble Oak Trail
Houston, TX 77059
136,500 14,296 Frank C. Turner, II 150,796 1.5%
1406 Tallow Court
Seabrook, TX 77586
156,500 6,996 Robert W. Hammons 163,496 1.7%
915 Kentbury Court
Katy, TX 77450
13,500 -- Lynn M. Davis 13,500 --
121 Donna Circle
Daphne, AL 36526
49,734 376,241 Edward P. Turner, Jr.(1) 425,975 4.3%
100 Central Avenue
Chatom, AL 36518
47,000 1,187,556 C. J. Lett, III(2) 1,234,556 12.6%
9320 East Central
Wichita, KS 67206
49,533 -- Frank E. Bolling, Jr. 49,533 0.5%
3830 Kendale Drive
Gautier, MS 39553
15,000 13,000 Gary R Christopher(3) 28,000 0.3%
6733 South Yale
Tulsa, OK 74136
132,466 684,222 Alvin V. Shoemaker(4) 816,688 8.3%
8800 First Avenue
Stone Harbor, NJ 08247
III-6
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C>
70,867 109,816 Stephen W. Herod(5) 180,683 1.8%
1110 Briar Ridge Drive
Houston, TX 77057
All executive officers and
directors as a group
(10 persons) 3,310,438 33.7%
</TABLE>
(1) Includes 362,803 shares owned by Bay City Energy Group, Inc. in which
Mr. Turner has indirect voting control but not a direct beneficial
interest, and 13,438 shares over which Mr. Turner has sole voting and
dispositive power.
(2) Mr. Lett was named Executive Vice President and a director of Middle
Bay on February 28, 1997 in connection with Middle Bay's Bison Merger.
(3) Mr. Christopher is an officer of Kaiser-Francis Oil Company, which is
the beneficial owner of 3,333,334 of Middle Bay's common shares.
(4) Mr. Shoemaker was named a director of Middle Bay in July 1997 in
connection with the Shore Oil Company merger. Consists of 117,466
shares of Series B preferred stock convertible into 117,466 common
shares of Middle Bay.
(5) Mr. Herod was named Vice President - Corporate Development and a
director of Middle Bay in July 1997 in connection with the Shore Oil
Company merger. Consists of 15,867 shares of Series B preferred stock
convertible into 15,867 common shares of Middle Bay.
(6) The nature of beneficial ownership for all shares is sole voting and
investment power.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has a note receivable from Middle Bay, an owner of 80%
of the outstanding common stock of the Company, as of December 31, 1998 of
$5,148,000. The principal balance of the note accrues interest at the prime
rate and is due on demand. The note consists of advances to Middle Bay for
general corporate purposes and is unsecured. Interest of $227,000 was accrued
on the note as of December 31, 1998.
Middle Bay financed its tender offer with cash provided by Compass
Bank and Bank of Oklahoma (the "Banks"). The debt proceeds used to finance
the tender offer, approximately $15.9 million, was shown on the balance sheet
of Middle Bay. Pursuant to the terms of the credit agreement between Middle
Bay, the Company and the Banks, the Banks hold a security interest in certain
oil and gas properties of the Company. If certain properties are sold by the
Company an amount determined by the Banks would have to be paid on the
outstanding principal balance of the debt. The debt payment could be made by
Middle Bay or the Company. Amounts paid to the Banks by the Company would
reduce the amount of sales proceeds the Company would retain. Amounts paid to
the Banks by Middle Bay would reduce the amount of cash available to be paid
to the Company. The principal balance of debt outstanding on Middle Bay's
financial statements at December 31, 1998 was approximately $27.5 million.
All of the officers and directors of the Company also serve as the
officers and directors of Middle Bay.
III-7
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<C> <C> <S>
(a) Exhibits
3.1 Certificate of Incorporation of the Company
as currently in effect(1)
3.2 Bylaws of the Company as currently in
effect(1)
4.1 Form of Rights Agreement dated as of
September 4, 1990 between the Companys
predecessor-in-interest, Enex Resources
Corporation, a Colorado corporation (the
APredecessor@), and American Securities
Transfer, Incorporated, as Rights Agent,
which includes as exhibits thereto the Form
of Rights Certificate and the Summary of
Rights to Purchase Common Stock(2)
10.1 Enex Employees Stock Purchase Program(3)
10.2 1991 Non-Qualified Stock Option Award
Program(3)
10.3 1990 Non-Qualified Stock Option Plan(3)
10.4 1984 Incentive Stock Option Plan and 1979
Employees Non-Qualified Stock Option Plan(4)
10.5 Credit Agreement between the Company and
Middle Bay Oil Company, Inc., as borrower,
and Compass Bank, as agent and lender, Bank
of Oklahoma, N.A., as a lender, and the
other lenders signatory thereto dated March
27, 1998(5)
16.1 Letter from Deloitte & Touche, LLP regarding
change in certifying public accountants
dated October 26, 1998(6)
21.1 Subsidiaries of the Company(7)
</TABLE>
1. Incorporated by reference to Exhibits to Form 8-K dated June 30, 1992
2. Incorporated by reference to Exhibits to Form 8-K dated September 4,
1990
3. Incorporated by reference to Exhibits to Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on March 22,
1993
4. Incorporated by reference to Exhibits to Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on July 1,
1992
5. Incorporated by reference to Exhibits to Amendment No. 3 and Final
Amendment to Schedule 14D-1 filed by Middle Bay Oil Company, Inc.
(MBOC) on April 13, 1998
6. Incorporated by reference to Exhibits to Form 8-K filed October 29,
1998
7. Incorporated by reference to Exhibits to Annual Report on Form 10-K
dated March 16, 1992
(b) Reports on Form 8-K
III-8
<PAGE>
On October 29, 1998, the Company filed a report on Form 8-K
under Item 4 notifying of a resignation of independent auditors. On November 12,
1998, this report was updated and amended on Form 8-K/A.
III-9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed by the undersigned, thereunto duly authorized.
ENEX RESOURCES CORPORATION
(Registrant)
/s/ John J. Bassett
By: -------------------------------------
John J. Bassett, President
April 15, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
APRIL 15, 1999 /s/ John J. Bassett
---------------------------- ----------------------------------------
Date John J. Bassett
Director, President, Chief Executive and
Operating Officer
APRIL 15, 1999 /s/ C.J. Lett III
---------------------------- ----------------------------------------
Date C. J. Lett, III
Executive Vice President and Director
APRIL 15, 1999 /s/ Stephen W. Herod
---------------------------- ----------------------------------------
Date Stephen W. Herod
Vice President and Director
APRIL 15, 1999 /s/ Edward P. Turner, Jr.
---------------------------- ----------------------------------------
Date Edward P. Turner, Jr.
Director
APRIL 15, 1999 /s/ Frank E. Bolling, Jr.
---------------------------- ----------------------------------------
Date Frank E. Bolling, Jr.
Director
APRIL 15, 1999 /s/ Gary R. Christopher
---------------------------- ----------------------------------------
Date Gary R. Christopher
Director
APRIL 15, 1999 /s/ Alvin V. Shoemaker
---------------------------- ----------------------------------------
Date Alvin V. Shoemaker
Director
</TABLE>
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,649
<SECURITIES> 0
<RECEIVABLES> 280,689
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 334,520
<PP&E> 4,008,272
<DEPRECIATION> (3,101,968)
<TOTAL-ASSETS> 13,055,861
<CURRENT-LIABILITIES> 212,514
<BONDS> 0
0
0
<COMMON> 10,897,718
<OTHER-SE> 1,945,629
<TOTAL-LIABILITY-AND-EQUITY> 13,055,861
<SALES> 5,877,445
<TOTAL-REVENUES> 7,394,035
<CGS> 3,419,838
<TOTAL-COSTS> 7,580,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (601,437)
<INCOME-TAX> 17,720
<INCOME-CONTINUING> (619,157)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (619,157)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
