<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number 0-18836
MIDLAND RESOURCES, INC.
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
TEXAS 75-2286814
---------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060
(Address of principal executive offices)
(281) 873-4828
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.001 par value: 4,424,071 shares outstanding at May 12, 1997
<PAGE>
MIDLAND RESOURCES, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996 3
Unaudited Consolidated Statements of Operations for the three
month periods ended March 31, 1997 and March 31, 1996 5
Unaudited Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1997 and March 31, 1996 6
Notes to Unaudited Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operation 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
Page 2
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PART I - FINANCIAL INFORMATION
MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 342,495 $ 366,677
Accounts receivable:
Oil and gas sales 610,962 834,269
Related parties 4,006 360,479
Other 493,700 359,600
Property held for sale - 1,241,515
Other current assets 160,503 104,180
Deferred tax asset 378,000 378,000
----------- ------------
Total current assets 1,989,666 3,644,720
Property and equipment, at cost, partially
pledged:
Oil and gas properties and equipment,
using successful efforts method 27,825,483 26,936,826
Transportation equipment 294,818 282,532
Computer equipment and software 243,240 229,155
Office furniture and equipment 96,732 94,299
Land, building and leasehold improvements 105,559 105,559
Wells in progress 245,188 241,209
Less accumulated depreciation, depletion
and amortization (14,354,901) (14,076,100)
----------- ------------
Property and equipment, net 14,456,119 13,813,480
Other assets:
Investment in limited partnership 602,532 -
Goodwill, net of amortization 740,600 747,271
Contracts and leases, net of amortization 406,173 414,633
Note receivable 314,339 317,759
Other 38,534 38,783
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Total assets $18,547,963 $ 18,976,646
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THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
Page 3
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MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,205,131 $ 1,680,830
Accounts payable and accrued expenses 1,806,979 1,194,344
Drilling advances - 393,254
----------- -----------
Total current liabilities 3,012,110 3,268,428
Long-term debt, net of discount 6,403,327 7,166,421
Deferred income tax liability 253,169 47,044
Payable for the purchase of subsidiary
and other 220,468 317,493
----------- -----------
Total liabilities 9,889,074 10,799,386
Stockholders' equity:
Preferred stock, par value $0.01 per
share; 20,000,000 shares authorized;
none issued - -
Common stock, par value $0.001 per
share; 80,000,000 shares authorized;
4,411,031 shares issued at March 31,
1997, and 4,401,031 shares at
December 31, 1996 4,411 4,401
Additional paid in capital 8,247,252 7,898,199
Unearned compensation (273,172) -
Retained earnings 680,398 274,660
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Total stockholders' equity 8,658,889 8,177,260
----------- -----------
Total liabilities and stockholders'
equity $18,547,963 $18,976,646
----------- -----------
----------- -----------
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
Page 4
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three months ended March 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating revenue:
Oil and gas sales $1,828,255 $1,493,141
Management fees - 15,000
Property operator fees 27,079 22,098
Other 2,805 1,153
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Total operating revenue 1,858,139 1,531,392
Operating costs and expenses:
Oil and gas production 737,489 681,785
Exploration costs 8,555 176,656
Depreciation, depletion and amortization 314,781 234,102
General and administrative 333,849 305,846
---------- ----------
Total operating costs and expenses 1,394,674 1,398,389
---------- ----------
463,465 133,003
Other income and (expenses):
Gain (loss) on sale of property and equipment 351,079 (1,889)
Interest and other income 9,956 16,434
Interest expense (212,637) (152,207)
---------- ----------
Total other income and expenses 148,398 (137,662)
---------- ----------
Income (loss) before income taxes 611,863 (4,659)
Deferred federal income tax expense (benefit) 206,125 (1,582)
---------- ----------
Net income (loss) $ 405,738 $ (3,077)
---------- ----------
---------- ----------
Earnings (loss) per common and common
equivalent share (NOTE A) $ 0.08 $ (0.001)
---------- ----------
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</TABLE>
The accompanying note is an integral part
of the financial statements.
Page 5
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Three months ended March 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 405,738 $ (3,077)
Deferred federal income tax expense (benefit) 206,125 (1,582)
Depreciation, depletion and amortization 314,781 234,102
(Gain) loss on sale of property and equipment (351,079) 1,889
(Increase) decrease in accounts receivable 89,207 (168,312)
Increase in receivable from related parties (4,006) (82,054)
Increase in due to related parties - 13,128
Increase in accounts payable relating
to operations 612,635 147,370
(Increase) decrease in other current assets (56,323) 29,677
Non-cash stock based compensation 43,078 -
Other 8,010 53,779
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Net cash provided by operating activities 1,268,166 224,920
Cash flows from investing activities:
Sales of property and equipment 1,649,407 1,000
Additions to property and equipment (980,292) (466,831)
Payments to minority interests in Summit (97,025) -
Investment in marketable equity securities - (312,249)
Investments in limited partnership (602,532) -
Cost reimbursement from limited partnership 360,479 -
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Net cash provided by (used in) investing activities 330,037 (778,080)
Cash flows from financing activities:
Exercise of stock options and warrants 32,813 9,232
Collection on note receivable 3,420 3,406
Short-term borrowing from bank - 70,000
Long-term borrowings 406,250 600,000
Principal payments on long-term debt (1,671,614) (585,577)
Repayment of drilling advances (393,254) -
----------- ---------
Net cash provided by (used in) financing activities (1,622,385) 97,061
----------- ---------
Net decrease in cash (24,182) (456,099)
Cash, beginning of the period 366,677 514,610
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Cash, end of period $ 342,495 $ 58,511
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</TABLE>
The accompanying note is an integral part
of the financial statements.
Page 6
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MIDLAND RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Midland Resources, Inc. ("Company"), was organized in 1990 with the issue of
common stock and warrants in exchange for oil and gas partnership interests.
The Company and its wholly owned subsidiaries are headquartered in Houston,
Texas. The Company is involved in the acquisition, exploration, development and
production of oil and gas and owns producing properties and undeveloped acreage
in Texas, North Dakota, Colorado, Illinois and Oklahoma. The majority of its
activities are centered in the Permian Basin of West Texas. Midland Resources
Operating Company Inc. ("MRO"), a wholly owned subsidiary, is in the business of
oil and gas property operations. Summit Petroleum Corporation ("Summit") is a
wholly owned subsidiary engaged in oil and gas acquisition, exploration,
development, production and property operations. Summit was acquired in 1996 in
a transaction accounted for as a purchase and has been included in the Company's
consolidated financial statements since October 1, 1996.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company and its wholly owned subsidiaries as of March
31, 1997, the results of operations for the three month periods ended March 31,
1997 and 1996 and cash flows for the three month periods ended March 31, 1997
and 1996. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for a full year. The
accounting policies followed by the Company are set forth in more detail in Note
A of the "Notes to Financial Statements" in the Company's annual report on Form
10-KSB filed with the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-QSB pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein are
adequate to make the information presented not misleading. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the Form 10-KSB.
EARNINGS PER SHARE
Earnings (loss) per common and common equivalent share for the three
month periods ended March 31, 1997 and 1996 is computed as follows:
<TABLE>
Three Months ended
March 31,
------------------------
1997 1996
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<S> <C> <C>
Net income (loss) $ 405,738 $ (3,077)
Assumed reduction in interest expense, net of taxes,
resulting from application of proceeds from assumed
exercise of options and warrants 106,590 -
---------- -----------
Net income (loss) for per share computations 512,328 (3,077)
---------- -----------
---------- -----------
Weighted average common and common equivalent shares:
Common stock 4,406,031 4,386,231
Stock options and warrants, net of shares assumed to
be repurchased with proceeds from assumed exercise
of options and warrants 1,979,150 -
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6,385,181 4,386,231
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Earnings (loss) per share $ 0.08 $ (0.001)
---------- -----------
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</TABLE>
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share" which
requires changes in the computation and reporting of earnings per share.
This pronouncement, which becomes effective January 1, 1998, provides for the
presentation of basic earnings per share, computed without regard to options,
warrants, and other stock equivalents, and diluted earnings per share, which
gives effect to common stock equivalents. The Company has not fully
determined the effects of these new rules on its reported earnings per share.
Page 7
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MIDLAND RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
The Company's initial capitalization was through the acquisition of the
interests of the seven public oil and gas income limited partnerships in
exchange for common stock and warrants of the Company. There were 2,264,522
shares of common stock issued and, for each share of common stock issued, two
warrants were issued entitling the holder to purchase one share of common stock
at $2.50 and one share at $4.00 during the period November 1990 to November
2002. In October 1995, the Company called for redemption of its $2.50 warrants.
Holders received a redemption payment of $0.05 per warrant for aggregate
payments of $63,373, which was charged to additional paid in capital. 997,009
of the $2.50 warrants were exercised, resulting in net proceeds of approximately
$1,831,000. As of December 31, 1996, none of the $4.00 warrants had been
exercised.
On December 20, 1996, the Company completed the acquisition of Summit, an
affiliated entity engaged in oil and gas acquisition, development and
exploration activities which owned interests in many of the same properties as
the Company. The Company's total investment in acquiring Summit is
approximately $2,011,000.
The Company has increased its proved reserves by more than 50% since 1993
through acquisitions with ascertainable additional reserve potential and a
selective program of drilling, workovers, recompletions and re-entries.
Historically, the Company's growth has been primarily through the acquisition
and subsequent development of proved oil and gas properties. During 1996, the
Company escalated its development and exploration activities with the drilling
of three successful development wells and three exploratory wells, one of which
was completed as a producing well. During the first quarter of 1997, the
Company completed two successful exploratory wells, one of which is held by a
limited partnership in which the Company serves as general partner. In April
1997, an additional exploratory well was successfully completed. The Company
intends to continue increasing production and reserves through exploration and
further development of existing oil and gas properties and future acquisitions.
The Company estimates that it will drill up to 24 wells in 1997 and 24 in 1998
at a cost of approximately $8.4 million per year to the Company's interest. The
majority of these will be development wells on recent 3D seismic discovery
locations. Four of these will be exploratory wells on separate features in the
3D seismic projects.
Management believes that the cost of its exploration and development programs
will be funded from additional debt and equity financing, and to a lesser extent
from cash flows from operations.
CAPITAL RESOURCES AND LIQUIDITY
In the first quarter of 1997, net cash provided by operations increased
from the same period in 1996 by $1,043,246, reflecting increased oil and gas
revenue, partially offset by increased production costs. Net cash from
investing activities increased from the first quarter of 1996 by $1,108,117,
due primarily from the sale of oil and gas properties, partially offset by
increased capital expenditures and an investment in an oil and gas limited
partnership for which the Company serves as general partner, as well as
payments on the Summit acquisition. Net cash provided by financing
activities decreased from 1996 by $1,719,446, due primarily to reductions in
long-term debt. In the first quarter of 1997, cash payments for development
of oil and gas properties totaled $963,774. During the same period in 1996,
cash payments for capital expenditures was $466,831, which was comprised
primarily of oil and gas development expenditures.
Page 8
<PAGE>
At March 31, 1997, the Company had negative working capital of approximately
$1,022,000 compared to positive working capital of approximately $376,000 at
December 31, 1996, for a net decrease of $1,398,000. This is due primarily
to the funding of the Company's oil and gas exploration and development program
from operations during the first quarter of 1997. Management believes that
additional long-term debt and equity financing are necessary for the Company
to finance its drilling and development plans. In the event that the Company
is unable to obtain the necessary financing, it has the ability to curtail
its drilling program so as to meet its financial obligations.
In December 1994, the Company's credit facility with its bank was increased
to $20,000,000 with a borrowing base of $7,000,000 and its terms were
extended. On June 1, 1995, the borrowing base was increased to $8,000,000,
and effective the same date, this note was amended to allow 25% of the
borrowing base to be used for working capital purposes and to decrease the
interest rate from prime rate plus 1.5% to prime rate plus 0.75%. In
exchange, the bank received 150,000 warrants to purchase common stock at
$4.00 per share. In October 1996, the borrowing base was increased to
$9,500,000, and in March 1997 was reduced to $8,200,000 as a result of the
sale of the Company's interest in the Redfish Bay properties. Amounts
outstanding under this loan agreement currently bear interest at a rate
which, at the Company's option, either fluctuates with the bank's prime rate,
or which is based on the London Interbank Offered Rate. Interest is payable
monthly as it accrues. The credit facility also provides for the payment of
a commitment fee equal to 1/2 of 1% of the unused balance of the borrowing
base; payable quarterly. The borrowing base is reduced by $100,000 per month
beginning April 1997 with final maturity in October 2000. The balance of
this note at March 31, 1997, was $7,565,554. This note is secured by the
majority of the Company's assets.
The prices of crude oil have fluctuated significantly in recent years as
well as in recent months. As of March 31, 1997, the Company was receiving
$19.50 per bbl as compared to $25.00 at January 1, 1997. Fluctuations
in price have a significant impact on the Company's financial condition and
liquidity. In the absence of rapid and dramatic decreases in oil and gas
prices, management believes it can maintain adequate liquidity for future
needs.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net income increased from a loss of $3,077 for the three months ended March
31, 1996, to a net income of $405,738 for the same period in 1997, an
increase of $408,815. Individual categories of income and expense are
discussed below.
Oil and gas sales increased from $1,493,141 in the first quarter of 1996 to
$1,828,255 in the same period of 1997. This increase of $335,114 or 22%
resulted from increased oil and gas prices, offset in part by decreased oil
production. Oil and gas sales included a $25,860 loss in 1996 from gas swap
contracts. Oil and gas production quantities were 46,425 bbls and 251,073
mcf for the first quarter of 1997 and 52,876 bbls and 250,233 mcf in 1996, a
decrease of 6,451 bbls or 12% and an increase of 840 mcf. Average gas prices
increased from $2.16 per mcf in 1996 to $3.01 per mcf in 1997, while average
oil prices increased from $18.49 per bbl in 1996 to $22.63 per bbl in 1997.
Production costs increased from $681,785 in the first quarter of 1996 to
$737,489 for the same period of 1997, an increase of $55,704 or 8%. This
increase was primarily attributable to the inclusion of Summit in the 1997
consolidated financial statements.
In the first quarter of 1997, the Company realized gains on the sales of
oil and gas properties and equipment of $351,079 and a loss for the same
period of 1996 of $1,889. The 1997 gain includes $349,079 from the sale of
the Company's interest in the Redfish Bay properties.
In the first quarter of 1996, the Company incurred exploration costs of
$176,656. This was comprised primarily of 3D seismic costs under a program
which is substantially completed. Exploration costs for the first quarter of
1997 were $8,555.
General and administrative expenses (G&A) were $333,849 in the first
quarter of 1997, an increase of $28,003 over the first quarter of 1996. This
is due primarily to non-cash stock based compensation of $43,078, partially
offset by decreases in various G&A categories.
Page 9
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Depreciation, depletion and amortization ("DD&A") based on production and
other methods increased from $234,102 in the first quarter of 1996 to $314,781
in the same period of 1997, an increase of $80,679 or 34%, due primarily to the
addition of Summit properties and normal reserve declines on some properties.
Interest expense increased from $152,207 for the first quarter of 1996 to
$212,637 for the same period of 1997, an increase of $60,430. This is due to
the increase in long-term debt used to finance property acquisitions and
development and the Summit acquisition in 1996.
Page 10
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 Article 5 Financial Data Schedule for first quarter 10-QSB
(only filed electronically)
b. Reports on Form 8-K - A report on Form 8-K was filed on February 25,
1997, reporting a change in the Registrant's Certifying Accountants
from Ernst & Young LLP to Grant Thornton LLP to audit the
Registrant's financial statements for the year ended December 31,
1996.
Page 11
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
MIDLAND RESOURCES, INC.
(Registrant)
Date: May 14, 1997 By: /s/ Deas H. Warley III
------------------------------------
Deas H. Warley III, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
Registrant and in the capacity and on the date indicated.
Date: May 14, 1997 By: /s/ Howard E. Ehler
------------------------------------
Howard E. Ehler, Chief Financial Officer
Page 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 342495
<SECURITIES> 0
<RECEIVABLES> 1108668
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1989666
<PP&E> 28811020
<DEPRECIATION> 14354901
<TOTAL-ASSETS> 18547963
<CURRENT-LIABILITIES> 3012110
<BONDS> 6403327
0
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