<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to _______
Commission File No. 0-21702
MIDDLE BAY OIL COMPANY, INC.
(Exact name of small business issuer as specified in its charter)
ALABAMA 63-1081013
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
115 SOUTH DEARBORN STREET
MOBILE, ALABAMA 36602
(Address of principal executive offices)
(334) 432-7540
(Issuer's telephone number)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Common stock, $.02 par value
4,471,420 shares as of October 31, 1997
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE> 2
MIDDLE BAY OIL COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets-
September 30, 1997 and December 31, 1996 ........................... 1
Consolidated Statements of Operations-
Nine months ended September 30, 1997 and 1996 ...................... 2
Consolidated Statements of Cash Flows-
Nine months ended September 30, 1997 and 1996 ...................... 3
Notes to Consolidated Financial Statements ............................ 4
Item 2. Management's Discussion and Analysis
or Plan of Operation ....................................... 19
PART II.
Item 1. Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults in Senior Securities
None
Item 4 Submission of Matters for a vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits & Reports on Form 8-K
(a) exhibits
Exhibit 27 - Financial (Data Schedule for SEC use only)
(b) Reports on Form 8-K
</TABLE>
As previously reported on the Company's 10-QSB for the quarter ended June 30,
1997, the Company, on July 3, 1997, filed a report on form 8-K under Items 2
and 7 describing the Company's Agreement and Plan of Merger with Shore Oil
Company whereby Shore Oil Company would become a wholly-owned subsidiary of the
Company for company stock and cash effective June 30th, 1997. The Company
filed an amendment to this form 8-K on September 3, 1997, whereby the Company
submitted audited financial statements, unaudited Pro-forma financial
information and certain exhibits under Item 7.
<PAGE> 3
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
SEPT 30 DECEMBER 31
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH $ 2,491,754 $ 556,026
NOTES AND ACCOUNTS RECEIVABLE- TRADE 2,201,971 1,129,417
OTHER CURRENT ASSETS 347,902 58,137
------------ ------------
TOTAL CURRENT ASSETS 5,041,627 1,743,580
NON-CURRENT ASSETS
NOTES RECEIVABLE- STOCKHOLDER 164,186 159,215
------------ ------------
164,186 159,215
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 57,104,073 16,252,576
FURNITURE, FIXTURES AND OTHER 772,921 354,603
------------ ------------
57,876,994 16,607,179
ACCUMULATED DEPRECIATION AND DEPLETION (7,923,438) (5,332,517)
------------ ------------
49,953,556 11,274,662
OTHER ASSETS 17,962 7,523
TOTAL ASSETS $ 55,177,330 $ 13,184,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT $ 920,825 $ 554,601
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,209,603 402,796
OTHER CURRENT LIABILITIES 55,382 -
------------ ------------
TOTAL CURRENT LIABILITIES 2,185,810 957,397
LONG-TERM DEBT 10,171,318 5,158,477
DEFERRED INCOME TAXES 7,469,443 610,785
REDEEMABLE COMMON STOCK - 421,179
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 5,000,000 AUTHORIZED
WITH 1,666,667 DESIGNATED SERIES A, NONE OTHER ISSUED
CUMULATIVE CONVERTIBLE SERIES A 8% PREFERRED STOCK, $6.00 STATED VALUE, 1,666,667 - -
DESIGNATED, 1,666,667 AND 166,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996, RESPECTIVELY. $10,000,000 AGGREGATE LIQUIDATION PREFERENCE 10,000,000 1,000,000
CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE, 266,667 SHARES ISSUED AND
OUTSTANDING AT SEPTEMBER 30, 1997, $2,000,000 AGGREGATE LIQUIDATION PREFERENCE 3,627,000 -
COMMON STOCK, $.02 PAR VALUE, 10,000,000 AUTHORIZED, 4,493,193+A85 AND 1,880,917 SHARES
ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996, RESPECTIVELY 89,871 37,618
PAID-IN-CAPITAL 22,769,689 6,049,442
LESS REDEEMABLE COMMON STOCK - (421,179)
UNEARNED STOCK COMPENSATION (168,750) -
DEFICIT (899,011) (560,699)
LESS COST OF TREASURY STOCK; 21,773 SHARES AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (68,040) (68,040)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 35,350,759 6,037,142
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND EQUITY $ 55,177,330 $ 13,184,980
============ ============
</TABLE>
See accompanying notes.
1
<PAGE> 4
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30 SEPT 30 SEPT 30 SEPT 30
1997 1996 1997 1996
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE
OIL AND GAS PRODUCTION AND PLANT INCOME $3,219,377 $ 1,103,117 $ 6,913,475 $3,186,255
INTEREST 37,464 4,145 45,054 10,335
OTHER 1,738 19,617 48,969 351,734
WELL OPERATING INCOME 135,584 - 335,586 -
LEASE BONUS AND DELAY RENTAL INCOME 890,010 - 890,010 -
GAIN ON SALE OF PROPERTY - - 3,867 37,814
---------- ----------- ----------- ----------
TOTAL REVENUE 4,284,172 1,126,879 8,236,960 3,586,138
---------- ----------- ----------- ----------
COSTS AND EXPENSES
WELL OPERATING $1,280,213 $ 332,496 $ 2,796,896 $1,104,066
EXPLORATION EXPENSES 16,254 - 131,445 -
DEPRECIATION, DEPLETION AND
AMORTIZATION 1,552,642 362,365 2,607,459 901,995
ABANDONMENT 210,414 158,033 446,133 249,568
INTEREST 218,553 128,809 478,296 375,799
STOCK COMPENSATION EXPENSE 101,250 101,250 -
GENERAL AND ADMINISTRATIVE 651,202 170,161 1,604,902 511,048
---------- ----------- ----------- ----------
TOTAL EXPENSES 4,030,528 1,151,864 8,166,381 3,142,476
INCOME (LOSS) BEFORE INCOME TAXES 253,644 (24,985) 70,579 443,662
INCOME TAXES - - - -
---------- ----------- ----------- ----------
NET INCOME (LOSS) 253,644 (24,985) 70,579 443,662
DIVIDENDS TO PREFERRED STOCKHOLDERS 204,444 - 408,889 -
---------- ----------- ----------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 49,200 $ (24,985) $ (338,310) $ 443,662
========== =========== =========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,457,531 1,310,638 3,033,236 1,318,917
========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.01 $ (0.02) $ (0.11) $ 0.34
========== =========== =========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 5
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
UNAUDITED
<TABLE>
<CAPTION>
SEPT 30 SEPT 30
1997 1996
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 70,579 $ 443,661
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION 2,607,459 901,995
STOCK COMPENSATION EXPENSE 101,250 -
CHANGES IN CURRENT ASSETS AND LIABILITIES EXCLUDING
EFFECTS OF BUSINESS ACQUISITIONS:
ACCOUNTS RECEIVABLE 471,535 335,456
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (665,497) (585,819)
GAIN ON SALE OF PROPERTIES - (37,814)
OTHER CHARGES (CREDITS) (163,659) (2,288)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,421,668 1,055,191
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 1,445,890 40,000
ADDITIONS TO OIL AND GAS PROPERTIES (6,215,345) (1,116,566)
PURCHASE OF EQUIPMENT (47,963) (1,827)
ACQUISITION OF BISON ENERGY CORPORATION, NET OF
CASH ACQUIRED OF $994,367 (7,139,914) -
ACQUISITION OF SHORE OIL COMPANY, NET OF
CASH ACQUIRED OF $2,057,467 (514,299) -
FURNITURE, FIXTURES AND OTHER ASSETS (70,288) (10,229)
PROCEEDS FROM SALE OF REAL ESTATE - 75,000
ADVANCES TO+A110 STOCKHOLDER (4,971) (4,971)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (12,546,890) (1,018,593)
FINANCING ACTIVITIES
PROCEEDS FROM COMMON STOCK ISSUED 195,775 -
PROCEEDS FROM PREFERRED STOCK ISSUED 9,000,000 -
PROCEEDS FROM DEBT ISSUED 5,769,702 483,766
PRINCIPAL PAYMENTS ON DEBT (2,495,638) (206,109)
PURCHASE OF STOCK FOR TREASURY - (68,040)
PREFERRED STOCK DIVIDENDS (408,889) -
------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,060,950 209,617
NET INCREASE (DECREASE) IN CASH 1,935,728 246,215
CASH- BEGINNING 556,026 80,791
------------ -----------
CASH- ENDING $ 2,491,754 $ 327,006
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH $ 478,296 $ 375,799
============ ===========
COMMON STOCK ISSUED IN ACQUISITION OF
BISON ENERGY CORPORATION $ 3,330,559 -
============ ===========
COMMON STOCK ISSUED IN ACQUISITION OF
SHORE OIL COMPANY $ 12,976,164 -
============ ===========
PREFERRED STOCK-SERIES B ISSUED IN ACQUISITION OF
SHORE OIL COMPANY $ 3,627,000 -
============ ===========
DEBT ASSUMED IN ACQUISITION OF SHORE OIL COMPANY $ 2,105,000 -
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE> 6
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Middle Bay Oil Company, Inc. (the Company), was incorporated under the laws
of the State of Alabama on November 30, 1992. The Company and its wholly-owned
subsidiaries (collectively referred to as the Company) are engaged in the
acquisition, development and production of oil and gas in the contiguous United
States.
Basis of Presentation
In management's opinion, the accompanying consolidated financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
as of September 30, 1997 and the consolidated results of operations and
consolidated cash flows for the nine months ended September 30, 1997 and 1996.
The accompanying consolidated financial statements have not been audited by
an independent accountant. Certain information and disclosures normally included
in annual audited financial statements prepared in accordance with generally
accepted accounting principles have been omitted, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the Company's financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
4
<PAGE> 7
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions are eliminated in consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company classifies all cash
investments with original maturities of three months or less as cash.
Accounts Receivable
The Company sells crude oil and natural gas to various customers. In
addition, the Company participates with other parties in the operation of crude
oil and natural gas wells. Substantially all of the Company's accounts
receivable are due from either purchasers of crude oil and natural gas or
participants in crude oil and natural gas wells for which the Company serves as
the operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues against unpaid charges related to operated
wells. Crude oil and natural gas sales are generally unsecured.
Properties
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under the successful efforts method, costs of acquiring
undeveloped oil and gas leasehold acreage, including lease bonuses, brokers'
fees and other related costs are capitalized. Provisions for impairment of
undeveloped oil and gas leases are based on periodic evaluations. Annual lease
rentals and exploration expenses, including geological and geophysical expenses
and exploratory dry hole costs, are charged against income as incurred. Costs of
drilling and equipping productive wells, including developmental dry holes and
related production facilities are capitalized.
5
<PAGE> 8
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Properties (continued)
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 an independent petroleum engineering firm. If
the capitalized costs of total proved properties exceed the sum of undiscounted
estimated future net revenues before income taxes from total proved reserves
(determined on a field-by-field basis), such excess is charged to expense in the
period in which it occurs and is not reinstated.
With respect to normal dispositions, the cost of properties retired or
otherwise disposed of, and the applicable accumulated depreciation, depletion
and amortization are removed from the accounts, and the resulting profit or
loss, if any, is reflected in current operations.
Site Restoration, Dismantlement & Abandonment Costs
Site restoration, dismantlement and abandonment costs (P&A costs) include
costs associated with dismantling and disposing of the facilities and equipment
required to operate a well and restoring the well site to specified conditions.
The Company develops specific estimates of its P&A costs based on consultations
with its engineers and reevaluates such estimates annually. Estimated future P&A
costs are accrued on a unit-of-production method based on proved reserves. As of
September 30, 1997 and December 31, 1996, the P&A costs accrued were immaterial.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS #121) was issued in March 1995 and was adopted by the Company in the
fourth quarter of 1996. This statement requires that long-lived assets be
reviewed for impairment when events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable. This review consists
of a comparison of the carrying value of the asset
6
<PAGE> 9
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Impairment of Long-Lived Assets (continued)
with the asset's expected future undiscounted cash flows without interest costs.
The asset's expected future undiscounted cash flows are determined by Lee
Keeling & Associates (Keeling), an independent engineering firm. To determine
the expected future cash flows of each property, Keeling estimated each
property's oil and gas reserves, relied on certain information supplied by the
Company regarding the oil and gas reserves, applied certain assumptions
regarding price and cost escalations, and applied certain discount factors for
risk, location, type of ownership interest, category of reserves, operational
characteristics, and other factors.
Estimates of expected future cash flows are to represent management's best
estimate based on reasonable and supportable assumptions and projections. If the
expected future cash flows exceed the carrying value of the asset, no impairment
is recognized. If the carrying value of the asset exceeds the expected future
cash flows, an impairment exists and is measured by the excess of the carrying
value over the estimated fair value of the asset. Any impairment provisions
recognized in accordance with SFAS #121 are permanent and may not be restored in
the future.
Property and Equipment
Property and equipment are stated at cost and depreciated on the accelerated
method over the appropriate life of the property.
Income Taxes
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
7
<PAGE> 10
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock-based Compensation
In October 1996, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based compensation plans. Effective
for fiscal years beginning after December 15, 1996, the statement provides the
option to continue under the accounting provisions of APB Opinion 25, while
requiring pro forma footnote disclosures of the effects on net income and
earnings per share, calculated as if the new method had been implemented. The
Company has adopted the financial reporting provisions of SFAS No. 123 for 1996,
but will continue under the accounting provisions of APB Opinion 25. Under APB
25, if the exercise price of an employee's stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Earnings (Loss) Per Share
Primary earnings (loss) per share equals net earnings (loss) divided by the
weighted average number of common shares outstanding during the period. Shares
issuable upon exercise of options are included in the computation of earnings
per common and common equivalent share to the extent that they are dilutive. For
the nine months ended September 30, 1997, neither the common equivalent shares
nor the assumed conversion of the preferred stock had a dilutive effect on the
loss per share calculations. Accordingly, the loss per share calculation for
such period is based on the weighted average number of common shares
outstanding. For the nine months ended September 30, 1996 and the third quarter
of 1996, the dilution from the common stock equivalents was immaterial.
Accordingly, the earnings per share calculations for such periods are based on
the weighted average number of common shares outstanding.
8
<PAGE> 11
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(2) ACQUISITIONS
On December 31, 1996, the Company completed the acquisition of NPC Energy
Corporation ("NPC"). The transaction consisted of a merger (the "NPC Merger") of
NPC into the Company and its separate corporate existence ceased.
The NPC Merger was accounted for as a purchase of NPC by MBOC and as a result
of the purchase method of accounting, MBOC's cost of acquiring NPC was allocated
to the assets and liabilities acquired based on estimated fair values.
The cost of acquiring NPC was approximately $3.20 million, consisting of the
following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 562,000 shares
of MBOC Common Stock issued ................ $1,967
Estimated fair value of 166,667 shares
of MBOC Series A Preferred Stock ........... 1,000
Cash on hand ................................ 226
Legal and accounting expenses ............... 35
-----
$3,228
=====
</TABLE>
The fair value of the securities issued in connection with the NPC Merger was
calculated assuming the price of the Company's common stock was $3.50 per share.
The Company's purchase price has been allocated to the assets and liabilities
of NPC based on preliminary estimates of the fair values with the remaining
purchase price allocated to proved oil and gas properties. No goodwill has been
recorded in this transaction.
The preliminary allocation of the purchase price is summarized as follows:
(in thousands)
<TABLE>
<S> <C>
Working capital ..................... $ 785
Oil and gas properties:
Proved ............................ 4,029
Debt assumed ........................ (468)
Deferred income taxes ............... (1,118)
------
$ 3,228
======
</TABLE>
9
<PAGE> 12
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(2) ACQUISITIONS (continued)
On February 28, 1997, the Company completed the acquisition of Bison Energy
Corporation ("BEC"). The transaction consisted of a merger (the "Bison Merger")
of BEC into Bison Energy Corporation-Alabama, a wholly-owned subsidiary of the
Company. On February 28, 1997, Bison Energy Corporation-Alabama merged into BEC
and its separate corporate existence ceased. BEC continues as a wholly-owned
subsidiary of the Company.
The Bison Merger was accounted for as a purchase of BEC by MBOC and as a
result of the purchase method of accounting, MBOC's cost of acquiring BEC was
allocated to the assets and liabilities acquired based on estimated fair values.
The cost of acquiring BEC was approximately $10 million, consisting of the
following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 605,556 shares
of MBOC Common Stock issued ................... $ 3,330
Estimated fair value of 1,000,000 shares
of MBOC Series A Preferred Stock .............. 6,000
Cash on hand ................................... 654
Other legal and accounting expenses ............ 35
------
$10,019
======
</TABLE>
The fair value of the securities issued in connection with the merger was
calculated using the price of the Company's common stock at the time the Bison
Merger was announced to the public of $5.50 per share.
The Company's purchase price has been allocated to the consolidated assets
and liabilities of BEC based on preliminary estimates of the fair values with
the remaining purchase price allocated to proved oil and gas properties. No
goodwill has been recorded in this transaction.
The preliminary allocation of the purchase price is summarized as follows:
(in thousands)
<TABLE>
<S> <C>
Working capital .......................... $ 694
Oil and gas properties:
Proved ................................. 10,954
Yard Inventory and equipment ............. 525
Deferred income taxes .................... (2,154)
-------
$ 10,019
=======
</TABLE>
10
<PAGE> 13
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(2) ACQUISITIONS (continued)
The price paid for BEC and the allocation of the purchase price, both
detailed above, excludes the $1,445,890 allocated to non-oil and gas assets that
were purchased in the merger and sold on March 3, 1997 for $1,445,890.
On June 30, 1997, the Company completed the acquisition of Shore Oil
Company("Shore"). The transaction consisted of a merger (the "Shore Merger") of
Shore into Shore Acquisition Company Inc., a wholly-owned subsidiary of the
Company. On June 30, 1997, Shore Acquisition Company merged into Shore and its
separate corporate existence ceased. Shore continues as a wholly-owned
subsidiary of the Company.
The merger was accounted for as a purchase of Shore by MBOC and as a result
of the purchase method of accounting, MBOC's cost of acquiring Shore was
allocated to the assets and liabilities acquired based on estimated fair values.
The cost of acquiring Shore was approximately $19 million, consisting of the
following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 1,883,333 shares
of MBOC Common Stock issued ................... $12,976
Estimated fair value of 266,667 shares
of MBOC Series B Preferred Stock .............. 3,627
Estimated fair value of 388,833 shares
of Series A Preferred Stock ................... 2,333
Cash consideration ............................. 200
Other legal and accounting expenses ............ 38
-------
$19,174
=======
</TABLE>
The fair value of the securities issued in connection with the merger was
calculated using the average price of the Company's common stock at the time the
Shore Merger was announced to the public and further adjusted for tradability
restrictions. An independent valuation firm determined the tradability discount
for the Company's common stock.
The Company's purchase price has been allocated to the consolidated assets and
liabilities of Shore based on preliminary estimates of the fair values with the
remaining purchase price allocated to proved oil and gas properties. No goodwill
has been recorded in this transaction.
11
<PAGE> 14
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
The preliminary allocation of the purchase price is summarized as follows:
(in thousands)
<TABLE>
<S> <C>
Working capital .......................... $ 2,288
Oil and gas properties:
Proved ................................. 18,004
Unproved ............................... 864
Fee minerals ............................. 4,796
Other assets ............................. 36
Debt assumed ............................. (2,105)
Deferred income taxes .................... (4,709)
------
$ 19,174
======
</TABLE>
The following pro forma data presents the results of the Company for the nine
months ended September 30, 1996 and 1997, as if the acquisitions of NPC, BEC and
Shore had occurred on January 1, 1996. 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 acquisitions been consummated as
presented. The following data reflect pro forma adjustments for oil and gas
revenues, production costs, depreciation and depletion related to the properties
and businesses acquired, preferred stock dividends on preferred stock issued,
and the related income tax effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Pro Forma
---------
Nine months ended
-----------------
Sept 30
-------
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Total Revenues ............... $ 11,146 $ 11,555
Loss ......................... $ (390) $ (499)
Loss per share ............... $ (0.09) $ (0.16)
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company has a receivable, including accrued interest, from Bay City
Energy Group, Inc. (BCEG), a significant stockholder, as of September 30, 1997
and December 31, 1996 in the amount of $164,186 and $159,215, respectively.
75,000 shares of Company common stock secure the note with principal and accrued
interest at 5% per annum due in full on January 1, 2001. During the nine months
ended September 30, 1997 and 1996, BCEG did not make any payments and was not
advanced any funds. Interest of $25,181 was accrued on the note at September 30,
1997.
12
<PAGE> 15
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
Sept 30 December 31
1997 1996
---------- ----------
<S> <C> <C>
Convertible Loan of $50,000,000 due March 31,
1998, secured by oil and gas properties, monthly
payments of interest only at Libor plus 1.75%,
convertible into a 72 month term note on March
31, 1998 10,956,298 --
Convertible Loan of $15,000,000 due March 31, 1998,
secured by oil and gas properties, monthly payments
of interest only at prime, convertible into a 72
month term note on March 31, 1998 -- --
Convertible Loan of $6,000,000 due September 30, 1997,
secured by oil and gas properties, monthly payments
of interest only at 1.5% over prime, convertible into
a 72 month term note on September 30, 1997 -- 5,186,596
Term note due August 31, 1998, secured by oil and gas
properties, repayable in monthly installments of
$27,590 plus interest at 9.5% -- 385,089
Note, due 1/1/99, secured by office building,
repayable in monthly installments
of $1,511 including interest
at 7 3/4% 135,845 141,393
----------- ----------
Total $11,092,143 $5,713,078
Less current maturities 920,825 554,601
----------- ----------
Long-term debt excluding current
maturities $10,171,318 $5,158,477
=========== ==========
</TABLE>
13
<PAGE> 16
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(4) LONG-TERM DEBT (continued)
The $50,000,000 convertible loan contains certain restrictive provisions, the
most significant of which restricts additional borrowings, either directly or
indirectly, and payment of dividends. At September 30, 1997, the Company was in
compliance with all covenants specified in the convertible loan and revolving
credit agreements.
(5) STOCKHOLDERS' EQUITY
In connection with the merger with Shore Oil Company, effective June 30,
1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series
B"). The Series B is nonvoting and pays no dividends. The Series B has a
liquidation value of $7.50 per share and is junior to the Series A Preferred.
For a period of sixty-nine months subsequent to June 30, 1997 any holder of the
Series B may convert all or any portion of Series B shares into Company Common
Stock ("Common") at a ratio of one share of Common for each Series B share or at
any time on or after January 1, 1998, the holders may convert pursuant to the
Alternative Conversion Method based on Cumulative Value. Upon expiration of the
conversion period, unless the Company has given notice to redeem the Series B,
all of the shares of Series B shall be automatically converted. In no event
shall the aggregate total number of shares of Common into which the Series B are
converted be less than 266,667 shares or exceed 1,333,333 shares, unless further
increased for any anti-dilution provisions.
The Alternative Conversion Method shall be computed as of December 31 of each
year following the merger date of June 30, 1997, by determining the incremental
amounts by which the Cumulative Value increases over the prior year's
computation. Each incremental increase in the Cumulative Value, when computed,
shall be divided by $8,000,000, with the resulting quotient (the "Alternative
Conversion Factor") multiplied by 266,667 to determine the number of Series B
shares which would be converted. The number of Common shares into which the
Series B would be converted shall be determined by multiplying 1,066,666 times
the then applicable Alternative Conversion Factor. The procedure shall be
repeated as of each December 31, with the applicable number of Series B shares
converted into Common shares. If on December 31 of any year during the
conversion period the aggregate Cumulative Value equals or exceeds $10,000,000,
then the remaining Series B shares will be convertible into a number of Common
shares equal to 1,333,333 shares less the aggregate number of Common shares
previously issued upon conversion.
14
<PAGE> 17
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(5) STOCKHOLDERS' EQUITY (continued)
The Cumulative Value means the value attributable to the approximately 40,000
acres of mineral interest owned by Shore in Terrebone, LaFourche and St. Mary
Parishes, Louisiana (the "Louisiana Acreage"). The Cumulative Value shall
initially be equal to $2,000,000 and shall not exceed $10,000,000. The
Cumulative Value shall be recomputed on an incremental basis as of December 31
of each year following the merger date of June 30, 1997 based: (1) on values
computed for newly-discovered, reworked or recompleted wells with a minimum of
nine months' production history; plus (2) lease bonus payments and delay rental
payments, seismic option payments, seismic permit payments, any other payments
and proceeds from the sale of properties or oil and gas interests on the
Louisiana Acreage received by the Company during the evaluation period if such
properties or oil and gas interests have not been previously included in the
computation of Cumulative Value. The Cumulative Value shall be reduced on each
recomputation date by the amount of any extraordinary claim or liability
asserted against or paid by the Company and relating to the Louisiana Acreage
during such evaluation period.
On September 4, 1996, the Company signed a stock purchase agreement with Kaiser
Francis Oil Company ("the Agreement"). Kaiser-Francis has agreed to purchase
1,666,667 shares of Series A Preferred Stock ("Preferred") at $6.00 per share,
for a total investment of $10,000,000. The parties have agreed to a five-year
purchase period, effective September 4, 1996, with minimum incremental
investments of $500,000 each. Each issuance of Preferred is subject to approval
by Kaiser-Francis of the use of proceeds. The Preferred is nonvoting and accrues
dividends at 8% per annum, payable quarterly in cash. The Preferred is
convertible at any time after issuance into shares of common stock at the rate
of two shares of common stock for each share of Preferred before January 1,
1998. The conversion rate decreases thereafter at 8% per annum. The Company will
pay the costs of registration of the Preferred or the underlying common stock
under the Securities Act of 1933 upon request of Kaiser-Francis. The Company may
redeem the Preferred in whole or in part, at any time after January 1, 2007 at a
price of $6.00 per share. As of September 30, 1997, 1,666,667 shares of the
Preferred had been issued.
On April 1, 1996, the Board of Directors authorized the repurchase of up to
$100,000 of Company common stock at a price per share not to exceed $3.25,
exclusive of brokerage costs. As of September 30, 1997 the Company had purchased
21,772.75 shares of common stock at a cost of $68,040.
15
<PAGE> 18
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(5) STOCKHOLDERS' EQUITY (continued)
On February 13, 1997, the Company awarded the President, Vice-President Chief
Financial Officer and Vice-President Engineering stock options to acquire
100,000, 62,500 and 62,500 shares of common stock, respectively, at an exercise
price of $5.50 per share. All of the options vested on the date of grant. The
exercise price was equal to the fair market value of common stock on the date of
grant. On the same date, the Company awarded to the President, Vice-President
Chief Financial Officer and Vice-President Engineering, 25,909, 11,591 and
11,591 shares of restricted stock of the Company, respectively. The restricted
stock awards are contingent on the performance of services to the Company in the
future with 50% of the restricted shares being earned over the six month period
July 1, 1997 to December 31, 1997 and 50% over the six month period January 1,
1998 to June 30, 1998.
On May 30, 1997, the Board of Directors granted options to acquire 85,000 shares
of Company common stock under the 1995 Stock Option and Stock Appreciation
Rights Plan to certain key employees. All of the options vested on the grant
date of May 30, 1997 with an exercise price of $7.75 per share, which was equal
to the fair market value of common stock on the date of grant. The options
expire ten years from the date of grant if not exercised. On February 6, 1997,
the Board of Directors granted options to acquire 210,000 shares of Company
common stock under the 1995 Stock Option and Stock Appreciation Rights Plan to
key employees and non-employee directors. All of the options vested on the grant
date of February 6, 1997 with an exercise price of $6.00 per share, which was
equal to the fair market value of common stock on the date of grant. The options
expire ten years from the date of grant if not exercised. On May 31, 1996, the
Board of Directors granted options to acquire 125,000 shares of Company common
stock under the 1995 Stock Option and Stock Appreciation Rights Plan to key
employees and non-employee directors. All of the options vested on the grant
date of May 31, 1996 with an exercise price of $2.50 per share, which was equal
to the fair market value of common stock on the date of grant. The options
expire ten years from the date of grant if not exercised.
16
<PAGE> 19
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(5) STOCKHOLDERS' EQUITY (continued)
Under the terms of the Janex Acquisition, the Company has a contingent
obligation to repurchase 142,107 common shares issued in the Janex Acquisition,
upon written notice delivered to the Company, beginning five years after the
closing date and continuing for thirty days thereafter, at a price of $6.00 per
share. This obligation shall terminate if the Company's stock trades at a share
price of $8.00 or greater for twenty consecutive trading days during the
thirty-six month period ending November 1, 1998. At the close of trading on
April 7, 1997, the Company's common stock had traded at an ask price that was
equal to, or exceeded, $8.00 per share for twenty consecutive trading days.
Therefore, the contingent obligation represented by the redeemable common stock
balance on the Company's balance sheet in the amount of $421,179 was
reclassified to additional paid-in capital effective April 7, 1997.
(6) INCOME TAXES
The Company's income tax expense (benefit) for continuing operations consists
of the following:
<TABLE>
<CAPTION>
Nine months Ended
Sept 30 Sept 30
1997 1996
------- -------
<S> <C> <C>
Current $ - $ -
Deferred - -
------- -------
Total $ - $ -
======= =======
</TABLE>
The Company's net deferred tax liability at September 30, 1997 and December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Sept 30 December 31
1997 1996
------ ------
<S> <C> <C>
Deferred tax liability
Oil and gas properties $ 7,676,367 $ 817,079
Deferred tax asset
Net operating losses (206,924) (206,924)
Valuation allowance - -
---------- --------
Net deferred tax liability $ 7,469,443 $ 610,785
========== ========
</TABLE>
17
<PAGE> 20
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(6) INCOME TAXES (continued)
As of December 31, 1996, the Company had approximately $1,242,000 of
operating loss carryforwards, with $433,000 expiring in 2009 and $404,000
expiring in 2010 and $405,000 in 2011. As of December 31, 1996 the Company had
$36,482 of AMT credit carryforwards and $22,000 of Section 29 tax credit
carryforwards.
(7) COMMITMENTS AND CONTINGENCIES
The Company's obligation under the terms of certain operating leases for
office equipment is immaterial. The Company is leasing 3,000 square foot of
office space for Bison Energy's headquarters in Wichita, Kansas for $3,000 per
month for three years. The Company is leasing 5,363 square foot of office space
for Shore Oil Company's headquarters in Houston, Texas. The twenty-four month
lease requires monthly lease payments of $5,791 through June 30, 1998 and $6,576
through June 30, 1999.
On April 3, 1996, the Company entered into a Joint Expense and Participation
Agreement with Brigham Oil and Gas, L.P. which allowed the Company to
participate in the drilling of eighty-seven (87) onshore wells in Texas and
Oklahoma over the twelve month period beginning April 1, 1996. The Company was
committed to fund $1,500,000 in drilling costs over this twelve-month period. As
of September 30, 1997, the Company had advanced $1,944,499 in drilling and
completion costs to Brigham Oil and Gas, L.P. The Company is no longer required
to advance Brigham any additional money under the Brigham Agreement.
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.
18
<PAGE> 21
Item 2. Management's Discussion and Analysis or Plan of Operations.
Liquidity and Capital Resources
Cash flow from operating activities for the nine months ended September 30,
1997 of $2,422,000 increased $1,366,000 over the comparable period. The increase
was due primarily to an increase in cash flow from oil and gas operations and
other income offset partially by working capital changes, increased general and
administrative expenses associated with the recent mergers and increased
dry-hole expenses and exploration costs. Cash flow from oil and gas sales
increased $1,672,000 over the comparable period. Oil prices were flat and gas
prices increased 7%, while oil production increased 100% and gas production
increased 85%. In addition to income from the sale of oil and natural gas,
income from gas processing at the plant located at the Spivey Grabs Field in
Kansas generated net income of $362,000. This revenue is derived principally
from gas processing and the sale of natural gas liquids (i.e. propane and
butane). The change in working capital reduced cash flow by $107,000 over the
comparable period. The change in working capital was caused principally by
timing differences in the payment of expenses and receipt of revenues. Cash flow
from operations before working capital changes of $2,779,000 increased
$1,473,000 over the comparable period. Additions to oil and gas properties were
higher than the comparable period due to the Bison Energy Corporation Merger
(the "Bison Merger") which closed February 28, 1997 and the Shore Oil Company
Merger (the "Shore Merger") which closed June 30, 1997 and increased
acquisitions and drilling in the current period. The increase in the amount of
cash used for debt payments was due primarily to the 2,105,000 refinancing of
the term note assumed in the Shore Merger and the $274,729 refinancing of the
note assumed in the NPC Merger. No principal payments have been required over
the period April 1, 1996 to September 30, 1997 on the Company's $6 million, $15
million and $50 million Convertible Loans. The increase in the proceeds from
debt issued was due to the refinancing of the notes assumed in the Shore and NPC
Mergers, $3,000,000 issued in the Riceville Acquisition and the financing of the
leasehold and seismic costs in the amount of $385,000 associated with the
Reflection Ridge Prospect. The increase in proceeds from issuance of preferred
stock was due to the preferred stock issued to finance portions of the Bison
Merger and the Shore Merger.
The Company's operating activities provided net cash of $2,422,000 for the
nine-month period ended September 30, 1997. During this period, net cash from
operations was used principally for exploratory and developmental drilling of
$1,531,000, workovers of $413,000, prospects of $307,000 and proved property
acquisitions of $685,000. The Riceville Acquisition accounted for $500,000 of
the cash spent on proved property acquisitions. Debt was used to finance
$285,000 of prospects and $3,000,000 in proved property acquisitions. Of the
total amount spent on exploratory and developmental drilling, approximately
$420,000 was spent in the Brigham Agreement and $700,000 was spent in the Spivey
Grabs Field in Kansas. The Company incurred $446,000 in dry hole costs
consisting principally of $373,000 for wells drilled in the Brigham Agreement
and $54,000 on the Harrison well in the Spivey Grabs Field. Of the $413,000
spent on workovers, approximately $78,000 was spent at Wild Fork Creek Field in
Alabama, approximately $49,000 was spent in the Spivey Grabs Field in Kansas,
$55,000 at Custer City Field in Oklahoma, $48,000 at Lake Trammel Field in Texas
and $44,000 at the Wright Field in Louisiana. The remaining amount was spent on
several different properties. The $592,000 spent on prospects consisted of
$285,000 on Reflection Ridge in Kansas, $225,000 on Hawkins Ranch in Texas,
$27,000 on the Quarry Prospect in New Mexico and $55,000 on S. Highbaugh in
Texas. The Company spent $7,139,914 on the Bison Merger. This includes the
19
<PAGE> 22
$1,445,890 in non-oil and gas assets, which were subsequently sold for the
amount paid. The Company spent $514,299 on the Shore Merger. Amounts spent on
debt retirement consisted principally of the payment in full of the note assumed
in the Shore Merger of $2,105,000, monthly principal payments on the $385,089
term note assumed in the NPC Merger and the refinancing of the NPC term note of
$274,000. The principal payments on the $6 million Convertible Loan were
suspended when the Company converted the $5.6 million term note to a $6 million
Convertible Loan on April 3, 1996.
In conjunction with the Shore Merger on June 30, 1997, the Company assumed a
term note in the principal amount of $2,105,000, which accrues interest at prime
plus three-fourths of a percent. Interest is paid quarterly with the entire
principal balance to be paid in full on April 1, 1999. The entire principal
balance was paid in August 1997 with proceeds from the Company's $50 million
Convertible Loan at the Bank of Oklahoma.
On April 3, 1996, the Bank converted its $5.6 million term note into a $6.0
million, one-year, revolving line-of-credit (the "$6 million Convertible Loan"),
effective April 1, 1996. The $6 million Convertible Loan required monthly
payments of interest only at prime plus 1.5% and converted into a term note
payable in seventy-one consecutive equal monthly principal and interest payments
at prime plus 1.5%, with the remaining principal and interest payment due on
March 31, 2003. Effective, March 31, 1997, the Company refinanced the $6 million
Convertible Loan at its current principal balance of $5,186,596 with a $15
million Convertible Loan. The $15 million Convertible Loan requires monthly
payments of interest only at prime for one year and converts into a term note
payable in seventy-one consecutive equal monthly principal and interest payments
at prime, with the remaining principal and interest payment due on March 31,
2004. The $15 million Convertible Loan also requires payment of a commitment fee
equal to an annual rate of three-eighths percent of the excess of the Borrowing
Base over the principal balance of the convertible note. Effective, September 1,
1997, the Company refinanced the $15 million Convertible Loan at its current
principal balance of $5,851,298 with a $50 million Convertible Loan. The $50
million Convertible Loan requires monthly payments of interest only at a fixed
rate of Libor plus 1.75% as long as the principal amount of the loan is less
than 75% of the current borrowing base of $15 million. If the principal amount
of the loan is greater than or equal to 75% of the borrowing base the rate
increases to Libor plus 2.75%. The Company has the option of switching to a
floating prime rate. The $50 million Convertible Loan converts into a term note
payable in seventy-one consecutive equal monthly principal and interest payments
at prime, with the remaining principal and interest payment due on March 31,
2004. The $50 million Convertible Loan also requires payment of a commitment fee
equal to an annual rate of three-eighths percent of the excess of the Borrowing
Base over the principal balance of the convertible note.
Under the terms of the $50 million Convertible Loan, the Company can be
advanced a maximum of $15 million, which is the current Borrowing Base.
Depending upon the value of reserves purchased and discovered the Company can
borrow a maximum of $50 million. The Borrowing Base is based on the Bank's
engineer's or any other independent engineer's calculation of the value of the
Company's oil and gas reserves, using the Bank's pricing and discount factors
and the future net revenue expected to be produced from the Company's oil and
gas reserves. The Borrowing Base is redetermined on September 30 and March 31 of
each year. In August, 1997 the Bank advanced the Company $2,105,000 to retire
the principal balance of the term note assumed in the Shore Merger and
$3,000,000 for the proved property acquisition in the Riceville Field in
Louisiana.
20
<PAGE> 23
Under the previous $15 million Convertible Loan, on May 9, 1997 the Bank
advanced the Company $385,000 for lease acquisition, and 3-D seismic shooting
and analysis on the Reflection Ridge prospect in Kansas and $275,775 to retire
the principal and accrued interest on the note assumed in the NPC Merger.
The Company had current assets of $5,041,627 and current liabilities of
$2,185,810, which resulted in working capital of $2,855,817 as of September 30,
1997. This was an increase of $2,069,634 from the working capital of $786,183 as
of December 31, 1996. Working capital increased primarily due to cash and
receivables acquired in the Bison Merger and the Shore Merger and no monthly
principal payments on the Revolver offset partially by amounts spent on
exploratory and developmental drilling and proved property acquisitions. The
Company's current ratio of 3.96, calculated under the terms of the Credit
Agreement, which excludes stockholder receivables and debt due under the Credit
Agreement, was in excess of the 0.90 to 1.00 required.
At March 31, 1997, based on the final reconciliation on August 1, 1997, a
total of sixty-one wells were spudded under the Brigham Agreement. Of these
sixty-one, forty-three were completed and eighteen were dry holes. The total
funds advanced to Brigham for the twelve-month period ending March 31, 1997 and
the final reconciliation was $1,944,499. The Company is no longer required to
advance Brigham any additional money under the Brigham Agreement.
In general, because the Company's principal natural gas and oil reserves are
depleted by production, its success is dependent upon the results of its
development, acquisition and exploration activities. The Company's strategy is
to enhance and exploit its existing properties for reserves, to invest in
exploratory and developmental drilling prospects and to acquire reserves. The
Company expects to incur a minimum of approximately $3,000,000 in capital
expenditures over the next twelve months: $850,000 for developmental drilling,
$1,700,000 for exploratory drilling and $450,000 for 3-D seismic and leasehold
acquisitions. These capital expenditures will be funded by internally generated
cash flows, proceeds from property sales and bank debt.
As of March 31, 1997, the Company had a contingent obligation to repurchase
70,196 common shares issued in the Janex Acquisition, upon written notice
delivered to the Company, beginning five years after the closing date and
continuing for thirty days thereafter, at a price of $6.00 per share. This
obligation shall terminate if the Company's stock trades at a share price of
$8.00 or greater for twenty consecutive trading days during the thirty-six month
period ending November 1, 1998. At the close of trading on April 7, 1997, the
Company's common stock had traded at an ask price that was equal to, or
exceeded, $8.00 per share for twenty consecutive trading days. In accordance
with the Janex Acquisition agreement, the redeemable common stock balance of
$421,179 was reclassified to additional paid-in capital effective April 7, 1997.
On September 4, 1996, the Company signed a stock purchase agreement with
Kaiser Francis Oil Company ("the Agreement"). Kaiser-Francis has agreed to
purchase 1,666,667 shares of Series A Preferred Stock ("Preferred") at $6.00 per
share, for a total investment of $10,000,000. The parties have agreed to a
five-year purchase period, effective September 4, 1996, with minimum incremental
investments of $500,000 each. Each issuance of Preferred is subject to approval
by Kaiser-Francis of the use of proceeds. The Preferred is nonvoting and accrues
dividends at 8% per annum, payable quarterly in
21
<PAGE> 24
cash. The Preferred is convertible at any time after issuance into shares of
common stock at the rate of two shares of common stock for each share of
Preferred before January 1, 1998. The conversion rate decreases thereafter at 8%
per annum. The Company will pay the costs of registration of the Preferred or
the underlying common stock under the Securities Act of 1933 upon request of
Kaiser-Francis. The Company may redeem the Preferred in whole or in part, at any
time after January 1, 2007 at a price of $6.00 per share. As of September 30,
1997 1,666,667 shares of the Preferred had been issued.
In August, 1997 the Company executed an exploration agreement with Brigham
Exploration Company for a 3-D seismic exploration project on the Hawkins Ranch
in Matagorda County, Texas. The ranch has been lease optioned for a 54 square
mile 3-D seismic survey. MBOC will have a 22.5% working interest through the
selection phase of the project. Field operations are scheduled to begin in early
1998 and processed data should be available during the third quarter of 1998.
The initial well is projected to spud in the first quarter of 1999. MBOC paid
approximately $225,000 for its share of the lease option.
In August, 1997 the Company acquired a 5.74% working interest in proved
producing reserves in the Riceville Field in Vermillion Parish, Louisiana for
approximately $3,500,000. The acquisition was financed with $3,000,000 in loan
proceeds and the remainder from cash on hand.
The Company's liquidity position and current and anticipated cash flows from
operations remain adequate for its general requirements. However, because future
cash flows and the availability of financing are subject to a number of
variables, such as the level of production and prices received for gas and oil,
there can be no assurance that the Company's capital resources will be
sufficient to maintain planned levels of capital expenditures.
For the nine months ended September 1997, the Company had invested
approximately $610,000 in two 3-D seismic exploration projects (Reflection Ridge
and Hawkins Ranch). In the past, the Company has generally invested in
exploration projects where 3-D seismic and 3-D seismic interpretation had
already been completed or was not necessary. In addition, the Company has never
invested this much capital on any two exploration projects at this stage. The
two seismic exploration projects that the Company has invested in are high-risk
projects where the entire capital investment may be lost. The Company financed
the 3-D projects with $385,000 in debt and $225,000 in cash. It is expected that
multiple wells will be drilled on both projects after the seismic is
interpreted. If these wells are dry holes and it is determined that there is no
economically recoverable oil and gas on the leasehold, all of the cost of the
wells and the leasehold will be expensed. Conversely, if either of these two
projects is successful, it could materially increase the oil and gas reserves
and the value of the Company.
Current Activities
At November 5, 1997, one exploratory well was being drilled in Louisiana.
22
<PAGE> 25
Results of Operations
Three Months September 30, 1997 and 1996
Total revenues for the three months ended September 30, 1997 of $4,284,000
were $3,157,000 higher than the comparable period. The increase in total
revenues was due principally to higher oil and gas revenues of $2,116,000 and
$890,000 in lease bonus and delay rental income.
The increase in oil and gas revenues consisted primarily of a $957,000
increase in oil revenues and a $916,000 increase in gas revenues. Also
contributing to the revenue increase was $260,000 in revenue from gas processing
at the gas plant located at the Spivey Grabs Field in Harper County, Kansas. The
gas processing plant was acquired in the Bison Merger, which was effective
February 28, 1997. The increase in oil and gas revenues was the result of higher
oil and gas production. Production of oil increased 219% and production of gas
increased 162%, over the comparable period. The oil production increase of
56,328 barrels consisted principally of a 20,557 barrel increase from the NPC
and Bison mergers and a 34,189 increase from the Shore Merger. The gas
production increase of 412,695 Mcf consisted principally of a 191,531 Mcf
increase from the NPC and Bison mergers and a 180,068 Mcf increase from the
Shore Merger. During the three month period ended September 30, 1997, the
Company sold 82,063 barrels of oil and 667,773 Mcf of gas, as compared to 25,735
barrels and 255,078 Mcf for the comparable period. The price received on the gas
sold in 1997 of $2.17 per Mcf was slightly higher than the $2.09 per Mcf
received in the comparable period. Oil prices in 1997 of $18.42 per barrel were
lower than the $21.28 per barrel received in 1996.
Total expenses increased by $2,879,000 over the comparable period. Due to the
growth of the Company over the last twelve months, all categories of expenses
increased. Lease operating expenses increased $948,000. The increase was due
principally to a $493,000 increase in operating expenses associated with the
Bison and NPC mergers and $452,000 increase associated with the Shore Merger.
Depletion and depreciation expense increased by $1,190,000. Depletion was higher
due to depletion on properties acquired in the NPC and Bison mergers and the
Shore Merger. Depletion on the properties acquired in the Shore Merger amounted
to $874,000. Depreciation increased due to computer and software equipment
acquired in the current period. General and administrative expenses ("G&A")
increased by $481,000. The increase in the G&A from the Bison Merger was reduced
effective August 1, 1997 due to the expiration of the six month transition
period on August 1, 1997 which was part of the Bison Merger. The increase in G&A
consists primarily of a $207,000 increase in salaries, an increase of $72,000 in
geological, accounting and legal expenses and a $29,000 increase in office
supplies and expense. The increase in salary expense is due to increases in
salaries of existing employees and salaries associated with employees added in
the Bison and Shore Mergers. At the time of the Bison Merger seven employees
occupied the Wichita, Kansas office. Effective August 1, 1997, only four
employees, the president of Bison, an engineer, geologist, and secretary will be
occupying the Wichita, Kansas office. The president of Shore, an engineer, and a
secretary were added in the Shore Merger. In addition, the Company hired a land
manager in July to manage the Company's land and mineral records. The Company
has paid moving allowances to its Alabama employees that have moved to Houston.
Abandonment expenses increased by $52,000. The increase in dry hole costs was
due to higher dry hole costs associated with the Brigham Agreement. Stock
compensation expense increased by $101,250 due to the July, 1997 start of the
vesting period of the restricted stock granted to certain Company employees in
February, 1997. All
23
<PAGE> 26
of the stock will be vested by June 30, 1998. Interest expense increased by
$90,000, due primarily to a higher loan balance.
The Company reported operating income of $253,000 for the three months ended
September 30, 1997 versus an operating loss of $25,000 for the comparable
period.
The Company reported net income of $253,000 for the three months ended
September 30, 1997 versus a net loss of $25,000 for the comparable period. After
considering the preferred stock dividend requirement of $204,000, the Company
reported net income available to common stockholders of $49,000. There was no
preferred stock dividend requirement in the comparable period.
Nine months September 30, 1997 and 1996
Total revenues for the nine months ended September 30, 1997 of $8,237,000
were $4,651,000 higher than the comparable period. The increase in total
revenues was due principally to higher oil and gas revenues of $3,727,000 and
lease bonus and delay rental income of $890,000.
The increase in oil and gas revenues consisted primarily of a $1,625,000
increase in oil revenues and a $1,504,000 increase in gas revenues. Also
contributing to the revenue increase was $647,000 in revenue from gas processing
at the gas plant located at the Spivey Grabs Field in Harper County, Kansas. The
gas processing plant was acquired in the Bison Merger, which was effective
February 28, 1997. The increase in oil and gas revenues was primarily the result
of higher oil and gas production. Production of oil increased 100% and
production of gas increased 85%, over the comparable period. The oil production
increase of 83,776 barrels consisted principally of a 48,803 barrel increase
from the NPC and Bison mergers and a 34,189 barrel increase from the Shore
Merger. The gas production increase of 615,391 Mcf consisted principally of a
393,002 Mcf increase from the NPC and Bison mergers and a 180,068 Mcf increase
from the Shore Merger. During the nine month period ended September 30, 1997,
the Company sold 166,737 barrels of oil and 1,343,429 Mcf of gas, as compared to
82,961 barrels and 728,038 Mcf for the comparable period. The price received on
the gas sold in 1997 of $2.26 per Mcf was slightly higher than the $2.11 per Mcf
received in the comparable period. Oil prices in 1997 of $19.35 per barrel were
slightly higher than the $19.29 per barrel received in 1996.
Total expenses increased by $5,024,000 over the comparable period. Due to the
growth of the Company over the last twelve months, all categories of expenses
increased. Lease operating expenses increased $1,693,000. The increase was due
principally to a $1,176,000 increase in operating expenses associated with the
Bison and NPC mergers and a $452,000 increase associated with the Shore Merger.
Depletion and depreciation expense increased by $1,705,000. Depletion was higher
due to depletion on properties acquired in the NPC and Bison mergers and the
Shore Merger. Depreciation was higher due to additional depreciation on
properties acquired in the Bison and Shore Mergers and computer equipment and
software acquired in the third quarter. General and administrative expenses
("G&A") increased by $1,094,000, consisting principally of increases due to the
Bison and Shore Mergers. The increase in the G&A from the Bison Merger was
reduced since August 1, 1997 due to the expiration of the six month transition
period on August 1, 1997 which was part of the Bison Merger. The increase in G&A
consists primarily of a $462,000 increase in salaries, an increase of $171,000
in geological, accounting and legal expenses, an increase of $95,000 in the
Company's SEP contribution and cash bonuses and a $69,000 increase in office
supplies and
24
<PAGE> 27
expense. The increase in salary expense is due to increases in salaries of
existing employees and salaries associated with employees added in the Bison and
Shore Mergers. At the time of the Bison Merger seven employees occupied the
Wichita, Kansas office. Effective August 1, 1997, only four employees, the
president of Bison, an engineer, geologist, and secretary will be occupying the
Wichita, Kansas office. The president of Shore, an engineer, and a secretary
were added in the Shore Merger. In addition, the Company hired a land manager in
July to manage the Company's land and mineral records. The increases in
professional fees and office expenses are associated with the increase in the
general activity of the company as its oil and gas reserve base increases. There
was only a $5,000 SEP contribution and no cash bonuses in the comparable period
versus $100,000 in SEP contribution and bonuses in the current period. The
Company has paid moving allowances to its Alabama employees that have moved to
Houston. Exploration expenses ("G&G Costs") increased $131,000. The Company paid
approximately $100,000 in G&G Costs on the Reflection Ridge Project in Kansas in
the second quarter. Abandonment expenses increased by $196,000. The increase in
dry hole costs was due principally to dry hole costs associated with the Brigham
Agreement and a $54,000 Harrison well dry hole in the Spivey Grabs Field in
1997. Stock compensation expense increased by $101,250 due to the July, 1997
start of the vesting of the restricted stock granted to certain Company
employees in February, 1997. All of the stock will be vested by June 30, 1998.
Interest expense increased by $102,000, due primarily to a higher loan balance.
The Company reported operating income of $70,000 for the nine months ended
September 30, 1997 versus operating income of $444,000 for the comparable
period.
The Company reported net income of $70,000 for the nine months ended
September 30, 1997 versus net income of $444,000 for the comparable period.
After considering the preferred stock dividend requirement of $409,000, the
Company, reported a net loss available to common stockholders of $338,000. There
was no preferred stock dividend requirement in the comparable period.
Approximately $131,000 in G&G costs was expensed in the current nine-month
period as required under the successful efforts method of accounting. The
successful efforts method of accounting, versus the full cost method, requires
the company to expense all G&G costs as incurred. G&G Costs include costs of
topographical, geological and geophysical studies, rights of access to conduct
those studies, and salaries and expenses of geologists, geophysical crews, or
others conducting those studies. Under the full cost method, all G&G Costs are
capitalized when incurred and are expensed only when the well or wells drilled
on the prospect are abandoned and the entire prospect is determined not to have
any economically recoverable oil or gas. Due to the differences in accounting
for G&G Costs, two companies could invest in the same drilling prospect and
report substantially different net income or loss for a particular reporting
period.
In the future, the Company intends to invest in additional prospects where
G&G costs are incurred. Currently, the Company does not intend to change its
method of accounting and as a result of this the Company will continue to report
exploration expenses which will reduce net income or increase net losses in the
future.
25
<PAGE> 28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MIDDLE BAY OIL COMPANY, INC.
(Registrant)
Date: November 14, 1997 By:/s/ Frank C. Turner II
----------------------
Frank C. Turner II
Vice-President and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS - BALANCE SHEETS AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE
STATEMENTS OF OPERATIONS AT SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,491,754
<SECURITIES> 0
<RECEIVABLES> 2,201,971
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,041,627
<PP&E> 57,876,994
<DEPRECIATION> (7,923,438)
<TOTAL-ASSETS> 55,177,330
<CURRENT-LIABILITIES> 2,185,810
<BONDS> 10,171,318
13,627,000
0
<COMMON> 89,871
<OTHER-SE> 22,769,689
<TOTAL-LIABILITY-AND-EQUITY> 55,177,330
<SALES> 6,913,475
<TOTAL-REVENUES> 8,236,960
<CGS> 2,796,896
<TOTAL-COSTS> 2,796,896
<OTHER-EXPENSES> 4,891,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 478,296
<INCOME-PRETAX> 70,579
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (338,310)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
