<PAGE>
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, 1998
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)
TEXAS 63-1081013
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1221 LAMAR STREET, SUITE 1020
HOUSTON, TX 77010
(Address of principal executive offices)
(713) 759-6808
(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
8,530,592 shares as of October 31, 1998
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
INDEX
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<CAPTION>
Page
No.
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<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)-
September 30, 1998 and December 31, 1997 ........................... 1
Consolidated Statements of Operations (Unaudited)-
Nine months ended September 30, 1998 and 1997 ...................... 2
Consolidated Statements of Cash Flows (Unaudited)-
Nine months ended September 30, 1998 and 1997 ...................... 3
Notes to Consolidated Financial Statements (Unaudited)................. 4
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operation .............. 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 33
</TABLE>
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
SEPT 30 DECEMBER 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 2,288,537 $ 1,587,184
NOTES AND ACCOUNTS RECEIVABLE- TRADE 2,731,919 2,352,679
ACCOUNTS RECEIVABLE-INSURANCE CLAIM 1,403,736 -
OTHER CURRENT ASSETS 166,329 57,726
ASSETS HELD FOR RESALE 206,466 206,464
------------ ------------
TOTAL CURRENT ASSETS 6,796,987 4,204,053
NON-CURRENT ASSETS
NOTES RECEIVABLE- STOCKHOLDER 171,377 166,165
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 90,222,235 62,685,623
FURNITURE, FIXTURES AND OTHER 798,020 822,806
------------ ------------
91,020,255 63,508,429
ACCUMULATED DEPRECIATION AND DEPLETION (32,863,730) (30,636,202)
------------ ------------
58,156,525 32,872,227
OTHER ASSETS 528,690 10,127
------------ ------------
TOTAL ASSETS $ 65,653,579 $ 37,252,572
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT $ 2,378,580 $ 1,375,537
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,853,279 1,176,680
OIL AND GAS REVENUE PAYABLE 373,864 308,981
OTHER CURRENT LIABILITIES 309,328 29,737
------------ ------------
TOTAL CURRENT LIABILITIES 6,915,051 2,890,935
LONG-TERM DEBT 25,204,567 9,714,713
DEFERRED INCOME TAXES 3,509,441 4,780,528
OTHER LIABILITIES 480,291 -
MINORITY INTEREST 6,821,864 -
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 10,000,000 and 5,000,000 AUTHORIZED AT
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY,
WITH 1,933,334 DESIGNATED, NONE ISSUED - -
CUMULATIVE CONVERTIBLE SERIES A 8% PREFERRED STOCK,
$6.00 STATED VALUE, 1,666,667 DESIGNATED, NO SHARES OUTSTANDING
AT SEPTEMBER 30, 1998. 166,667 SHARES ISSUED AND OUTSTANDING AT
DECEMBER 31, 1997. $10,000,000 AGGREGATE LIQUIDATION PREFERENCE - 10,000,000
CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE,
266,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1998 AND
DECEMBER 31, 1997. $2,000,000 AGGREGATE LIQUIDATION PREFERENCE 3,627,000 3,627,000
COMMON STOCK, $.02 PAR VALUE, 20,000,000 AND 10,0000 AUTHORIZED,
8,552,364 and 1,880,917 SHARES ISSUED AND OUTSTANDING AT
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY 171,047 90,392
PAID-IN-CAPITAL 38,272,127 23,029,299
UNEARNED STOCK COMPENSATION - (67,500)
ACCUMULATED DEFICIT (19,279,769) (16,744,755)
LESS COST OF TREASURY STOCK; 21,773 SHARES (68,040) (68,040)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,722,365 19,866,396
COMMITMENTS AND CONTINGENCIES
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,653,579 $ 37,252,572
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE
OIL AND GAS SALES AND PLANT INCOME $3,961,442 $3,219,377 $11,078,360 $6,913,475
GAIN ON SALE OF PROPERTY 1,518,139 - 1,527,207 3,867
LEASE BONUS & DELAY RENTAL INCOME 20,333 890,010 217,404 890,010
OTHER 194,846 39,201 436,783 94,022
---------- ---------- ----------- ----------
TOTAL REVENUE 5,694,760 4,148,588 13,259,754 7,901,374
---------- ---------- ----------- ----------
COSTS AND EXPENSES
WELL OPERATING 1,934,203 1,144,629 5,539,218 2,461,310
GEOLOGICAL AND GEOPHYSICAL 139,303 16,254 927,418 131,445
DEPRECIATION, DEPLETION AND
AMORTIZATION 1,945,110 1,552,642 4,970,052 2,607,459
IMPAIRMENT EXPENSE 492,000 - 492,000 -
DRYHOLE 24,141 210,414 331,405 446,133
INTEREST 615,792 218,553 1,428,633 478,296
STOCK COMPENSATION - 101,250 67,500 101,250
GENERAL AND ADMINISTRATIVE 975,435 651,202 3,235,988 1,604,902
---------- ---------- ----------- ----------
TOTAL EXPENSES 6,125,984 3,894,944 16,992,214 7,830,795
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (431,224) 253,644 (3,732,460) 70,579
MINORITY INTEREST 154,209 - 5,523 -
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (585,433) 253,644 (3,737,983) 70,579
INCOME TAX BENEFIT (199,047) - (1,270,914) -
---------- ---------- ----------- ----------
NET INCOME (LOSS) (386,386) 253,644 (2,467,069) 70,579
DIVIDENDS TO PREFERRED STOCKHOLDERS - 204,444 67,945 408,889
---------- ---------- ----------- ----------
NET INCOME (LOSS) AVAILABLE TO STOCKHOLDERS ($386,386) $ 49,200 ($2,535,014) ($338,310)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 8,530,592 4,457,531 7,889,947 3,033,236
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Diluted 8,530,592 4,457,531 7,889,947 3,033,236
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
NET INCOME (LOSS) PER COMMON SHARE
Basic ($0.05) $0.01 ($0.32) ($0.11)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Diluted ($0.05) $0.01 ($0.32) ($0.11)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED (UNAUDITED)
<TABLE>
<CAPTION>
SEPT 30 SEPT 30
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) ($2,467,069) $70,579
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION 4,970,052 2,607,459
IMPAIRMENT EXPENSE 492,000 -
DRYHOLE COSTS 331,405 446,133
STOCK COMPENSATION EXPENSE 67,500 101,250
GAIN ON SALE OF PROPERTIES (1,527,207) -
DEFERRED INCOME TAX BENEFIT (1,270,914) -
MINORITY INTEREST 5,523 -
CHANGES IN CURRENT ASSETS AND LIABILITIES EXCLUDING
EFFECTS OF BUSINESS ACQUISITIONS:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS (588,159) 471,535
ACCOUNTS PAYABLE, OIL AND GAS REVENUE PAYABLE,
AND OTHER CURRENT LIABILITIES 2,080,921 (665,497)
OTHER CHARGES (CREDITS) (34,680) (163,658)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,059,372 2,867,801
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 4,707,497 1,445,890
ADDITIONS TO OIL AND GAS PROPERTIES (3,305,635) (6,709,441)
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)
ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF
CASH ACQUIRED OF $4,698,211 (11,329,203) -
ACQUISITION OF ASSETS OF SERVICE DRILLING CO (6,337,689) -
FURNITURE, FIXTURES AND OTHER ASSETS (492,129) (70,288)
ADVANCES TO STOCKHOLDER (5,211) (4,971)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (16,762,370) (12,993,023)
FINANCING ACTIVITIES
PROCEEDS FROM COMMON STOCK ISSUED - 195,775
PROCEEDS FROM PREFERRED STOCK ISSUED - 9,000,000
PROCEEDS FROM DEBT ISSUED 32,469,604 5,769,702
PRINCIPAL PAYMENTS ON DEBT (15,976,432) (2,495,638)
PREFERRED STOCK DIVIDENDS (67,945) (408,889)
PARTNERSHIP DISTRIBUTIONS (778,501) -
OTHER (242,375) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,404,351 12,060,950
NET INCREASE IN CASH 701,353 1,935,728
CASH- BEGINNING 1,587,184 556,026
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CASH- ENDING $ 2,288,537 $ 2,491,754
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH $ 1,252,539 $ 478,296
------------ ------------
------------ ------------
CONVERSION OF SERIES A PREFERRED STOCK $ 10,000,000 -
------------ ------------
------------ ------------
COMMON STOCK ISSUED AS FINDERS' FEE
IN ENEX RESOURCES CORP. TENDER OFFER $ 245,231 -
------------ ------------
------------ ------------
COMMON STOCK ISSUED IN ACQUISITION OF ASSETS
FROM SERVICE DRILLING CO., LLC $ 5,078,250 -
------------ ------------
------------ ------------
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
------------ ------------
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Middle Bay Oil Company, Inc., was incorporated under the laws of the
State of Alabama on November 30, 1992. Effective March 27, 1998, the Company
acquired 79.2% of Enex Resources Corporation and effective April 16, 1998, the
Company acquired the assets of Service Drilling Co., LLC. In 1997, the Company
acquired Bison Energy Corporation and Shore Oil Company. The Company and its
subsidiaries 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, 1998 and December 31, 1997 and the consolidated
results of operations and consolidated cash flows for the periods ended
September 30, 1998 and 1997.
An independent accountant has not audited the accompanying consolidated
financial statements. 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/A for the year ended December 31,
1997.
Certain reclassifications have been made to conform with the current
presentation.
SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect industry standards and conform
to generally accepted accounting principles. The more significant of such
policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Middle Bay Production Company (formerly
Bison Production Company), Enex Resources Corporation (Enex), a 79.20% owned
subsidiary and Enex Consolidated Partners, L.P. (Enex Partnership), a limited
partnership of which Enex owns greater than a 50% interest. The equity of
minority interests in Enex and the Enex Partnership is shown in the consolidated
statements as "minority interest". Significant intercompany accounts and
transactions are eliminated in consolidation.
4
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities to prepare the financial statements.
Actual results could differ from those estimates.
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.
Oil and Gas Properties
The Company follows the "successful efforts" method of accounting for
its oil and gas properties, and accordingly, capitalizes all direct costs
incurred in connection with the acquisition, drilling, and development of
productive oil and gas properties. Costs associated with unsuccessful
exploration are charged to expense currently. Geological and geophysical costs
and costs of carrying and retaining unevaluated properties are charged to
expense. Depletion, depreciation and amortization of capitalized costs are
computed separately for each property based on the unit-of-production method
using only proved oil and gas reserves. In arriving at such rates, commercially
recoverable reserves have been estimated by independent petroleum engineering
firms. The Company reviews its undeveloped properties quarterly and charges them
to expense on a property by property basis when it is determined that they have
been condemned by dry holes, or will not be retained, sold or drilled upon.
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 quarterly.
Estimated future P&A costs are accrued on a unit-of-production method based on
proved reserves. As of September 30, 1998 approximately $485,000 of P&A costs
has been accrued. The P&A costs accrued at December 31, 1997 were immaterial.
5
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 No. 121) was issued in March 1995 and was adopted by the Company in the
fourth quarter of 1997. This statement requires that long-lived assets be
reviewed on a quarterly basis 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 with the asset's expected future undiscounted cash flows without interest
costs.
Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If the
expected future cash flows are less than the carrying value of the asset, an
impairment exists and is measured as the excess of the carrying value over the
estimated fair value of the asset. Any impairment provisions recognized in
accordance with SFAS No. 121 are permanent and may not be restored in the
future.
The impairment expense in the current period of $492,000 was due to an
unsuccessful recompletion attempt on the Goldberg #2 well in the Abbeville Field
located in Vermillion Parish, Louisiana. The reserves had been classified as
proved behind pipe.
Other Property and Equipment
Other property and equipment are stated at cost and depreciation is
computed over appropriate lives ranging from five to seven years. Additions and
betterments, which provide benefits to several periods, are capitalized.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are determined by applying enacted statutory tax rates applicable to future
years to the difference between the financial statement and tax basis of assets
and liabilities.
6
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." This statement establishes standards for computing and presenting
earnings per share, and requires, among other things, dual presentations of
basic and diluted earnings per share on the face of the statement of operations.
In accordance with SFAS No. 128, earnings per share and weighted average shares
outstanding have been restated to conform to this statement for all periods
presented. A weighted average of 330,297 and 288,535 common stock equivalents
are not considered in the 1998 calculation of diluted earnings per share for the
nine month and three month periods ending September 30, respectively, due to the
net loss recorded during these periods.
Concentrations of Market Risk
The future results of the Company will be affected by the market prices
of oil and natural gas. The availability of a ready market for natural gas and
oil in the future will depend on numerous factors beyond the control of the
Company, including weather, production of natural gas and crude oil, imports,
marketing of competitive fuels, proximity and capacity of oil and gas pipelines
and other transportation facilities, any oversupply or undersupply of gas and
oil, the regulatory environment, and other regional and political events, none
of which can be predicted with certainty.
7
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(2) ACQUISITIONS
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 was merged into the
Company on January 1, 1998.
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 common stock issued ....................... $ 3,330
Cash on hand .................................. 6,654
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 cost of acquiring BEC was allocated using the purchase method of
accounting to the consolidated assets and liabilities of BEC based on estimates
of the fair values with the remaining purchase price allocated to proved oil and
gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital .................... $ 714
Oil and gas properties ............. 13,268
Yard Inventory and equipment ....... 465
Deferred income taxes .............. (4,428)
--------
$ 10,019
--------
--------
</TABLE>
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 September 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 September 30, 1997, Shore Acquisition Company merged into
Shore and its separate corporate existence ceased. Shore was merged into the
Company on January 1, 1998.
8
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(2) ACQUISITIONS (continued)
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 common stock issued ........................ $12,976
Estimated fair value of 266,667 shares
of Series B Preferred Stock ................... 3,627
Cash consideration ............................. 2,533
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 cost of acquiring Shore was allocated using the purchase method of
accounting to the consolidated assets and liabilities of Shore based on
estimates of the fair values with the remaining purchase price allocated to
proved oil and gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital .............. $ 2,288
Oil and gas properties
Proved and unproved ........ 20,688
Fee minerals ................. 5,495
Debt assumed ................. (2,105)
Deferred income taxes ........ (7,192)
--------
$ 19,174
--------
--------
</TABLE>
On March 27, 1998, the Company acquired 1,064,032 common shares,
approximately 79%, of Enex Resources Corporation ("Enex") for $15,960,480. The
Company purchased the common shares of Enex through a cash tender offer (the
"Enex Acquisition"). The Company also incurred approximately $60,934 in legal,
accounting and printing expenses and issued 33,825 shares of Company common
stock for finders fees to unrelated third parties. Enex is general partner of
Enex Consolidated Partners, L.P., (the "Enex Partnership"), a New Jersey limited
partnership whose principal business is oil and gas exploration and production.
Enex's general partner interest is 4.1%. Enex also owns an approximate 56%
limited partner interest.
9
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(2) ACQUISITIONS (continued)
As part of the Enex Acquisition, the Company entered into an agreement,
effective April 15, 1998, with the former president of Enex that provides for
monthly payments of $20,000 until expiration of the agreement on May 18, 2002.
The monthly payments serve as consideration for consulting, a covenant not to
compete and a preferential right to purchase certain oil and gas acquisitions
which the former president controls or proposes to acquire during the term of
the agreement. The Company will reimburse the former president each month for
reasonable and necessary business expenses incurred in connection with the
performance of consulting services. The agreement survives the former president
and his spouse and is nonassignable. The present value of the agreement,
applying a 10% discount, is approximately $788,563 with the long-term portion
classified as other liabilities.
The cost of acquiring the 79.20% of Enex was allocated using the
purchase method of accounting to the consolidated assets and liabilities of Enex
based on estimates of the fair values with the remaining purchase price
allocated to proved oil and gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital .............. $ 5,640
Oil and gas properties ....... 19,090
Minority Interest ............ (7,669)
--------
$ 17,061
--------
--------
</TABLE>
On April 16, 1998, the Company acquired substantially all of the oil and
gas assets of Service Drilling Co., LLC and certain affiliates ("Service
Drilling"), in exchange for 666,000 shares of Company common stock and
$6,500,000 in cash for a total acquisition cost of $11,578,250, before
post-closing adjustments (the "Service Acquisition"). The effective date of the
acquisition was March 1, 1998 and the cost was allocated using the purchase
method of accounting.
On July 17, 1998, the Securities and Exchange Commission declared
effective a registration statement filed under the Securities Act of 1933 for
the merger of Enex into the Company (the "Enex Merger"). A special meeting of
the stockholders of Enex was held on August 20, 1998 to approve the Enex Merger.
Due to market conditions, the Company voted against the Enex Merger. As of
September 30, 1998, the Company owns approximately 79.2% of Enex.
The Company filed a preliminary registration statement on July 31, 1998
for the merger of the Enex Partnership into the Company (the "Enex Partnership
Merger"). At September 30 the Enex Partnership Merger was not completed.
10
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(2) ACQUISITIONS (concluded)
As of September 30, 1998 the Company had capitalized approximately
$313,000 in legal, accounting and other fees for preparation of the registration
statements for the Enex and the Enex Partnership Mergers. Due to the
postponement of the Enex Merger, the Company impaired the capitalized deal costs
related to the Enex Merger by approximately $30,000.
The following pro forma data presents the results of the Company for the
nine months ended September 30, 1997 and 1998, as if the acquisitions of BEC,
Shore, Enex and Service Drilling had occurred on January 1, 1997. The pro forma
results are presented for comparative purposes only and are not necessarily
indicative of the results which would have been obtained had the 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, interest expense on the debt issued
and the related income tax effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Pro Forma
Nine months ended
September 30
---------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Total Revenues ........................... $ 16,593 $ 20,949
Net Loss Available to Stockholders ....... $ (3,374) $ (209)
Net Loss per Share
Available to Stockholders ............. $ (0.42) $ (0.04)
</TABLE>
(3) ACCOUNTS RECEIVABLE-INSURANCE CLAIM
The Company owns a 100% working interest in the Louis Mayard #1 well
located in Vermillion Parish, Louisiana. The Louis Mayard #1 (the "well") had
been shut in and the Company began a recompletion attempt on or about August 6,
1998. On August 11, 1998, an attempt to kill the well was made and it was
determined that the tubing and intermediate casing had failed resulting in an
uncontrolled underground flow. Due to the inability of the Company to shut in
the well using regular methods, special crews were called in to gain control of
the well. The well was shut in on or about October 9, 1998. The costs incurred
by the Company, through September 30, to gain control of the well were
approximately $1,404,000. The Company has a $3.0 million control of well
insurance policy that will reimburse the Company for the costs incurred to
regain control of the well. On November 4 the insurance company made a partial
payment to the Company of approximately $1,408,000. At September 30, the Company
had recorded the estimated amount due from the insurance company in current
assets as Accounts Receivable-Insurance Claim.
11
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(4) RELATED PARTY TRANSACTIONS
The Company had a note receivable, including accrued interest, from Bay
City Energy Group, Inc. (BCEG), an entity controlled by certain members of the
Company's management and directors, as of September 30, 1998 and December 31,
1997 in the amount of $171,377 and $166,165, respectively. The principal balance
of the note accrues interest at 5% per annum and is due in full on January 1,
2001. 75,000 shares of Company common stock secure the note. During the nine
months ended September 30, 1998 and 1997, BCEG did not make any payments and was
not advanced any funds. Interest of $32,373 was accrued on the note at September
30, 1998.
The Company rents office space in Wichita, Kansas from C.J. Lett III, a
shareholder, officer and director of the Company. The rent is $3,000 per month
for three years through February, 2000.
The Company loaned Frank C. Turner II, Vice-President and Chief
Financial Officer, $14,400 in September, 1998 to pay income taxes associated
with the exercise of incentive stock options.
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
Reducing revolving line of credit of up to
$100,000,000 due April 1, 2001, secured by
oil and gas properties $27,454,567 --
Convertible Loan of $50,000,000 due September 30, 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 September 30, 1998 -- 10,956,298
Note, due 1/1/99, secured by office building, repayable in monthly installments
of $1,511 including interest at 7 3/4% 128,580 133,952
----------- -----------
Total $27,583,147 $11,090,250
Less current maturities 2,378,580 1,375,537
----------- -----------
Long-term debt excluding current maturities $25,204,567 $ 9,714,713
----------- -----------
----------- -----------
</TABLE>
12
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(5) LONG-TERM DEBT (continued)
Effective March 27, 1998 the Company entered into a new reducing
revolving line of credit agreement (the "$100 million Revolver") with Compass
Bank, as agent and lender, and Bank of Oklahoma, as a participant lender,
(collectively, the "Banks"). The $100 million Revolver provided for an initial
borrowing base of $29 million. The initial borrowing base was reduced to $27.5
million ten days after the effective date and further reduced by $275,000 per
month, beginning May 1, 1998 and ending October 1, 1998. In conjunction with the
Service Acquisition, the borrowing base was increased to $32.6 million and the
monthly borrowing base reductions were increased to $330,000. Effective October
1, 1998, the semi-annual borrowing base redetermination date, the borrowing base
was calculated to be approximately $28.9 million with monthly borrowing base
reductions of $250,000 beginning November 1, 1998. Effective January 1, 1999,
the borrowing base determined at October 1, 1998 will be adjusted to $25.4
million if the Company is not successful in acquiring the minority interest in
the Enex Partnership (the "Enex Partnership Merger"). If the Company
successfully completes the Enex Partnership Merger, the borrowing base
determined at October 1, 1998 will be readjusted to $33.1 million and the
monthly borrowing base reduction will be increased to $290,000.
The principal is due at maturity, April 1, 2001. Monthly principal
payments are made as required in order that the outstanding principal balance
does not exceed the borrowing base. Interest is payable monthly and is
calculated at the prime rate. The Company may also elect to calculate interest
under the Libor rate, as defined in the agreement. The Libor rate increases by
(a) 2.00% if the outstanding loan balance and letters of credit are equal to or
greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan
balance and letters of credit are less than 75% or greater than 50% of the
borrowing base, (c) 1.50% if the outstanding loan balance and letters of credit
are equal to or less than 50% of the borrowing base. Libor interest is payable
at maturity of the Libor loan which cannot be less than thirty days.
At September 30, 1998 the Company had borrowed approximately $27,454,567
and had approximately $550,432 of outstanding letters of credit. As of September
30, 1998, the Company is paying Libor plus 2.00% on a sixty day Libor loan for
$25,469,605 and prime on $1,984,962.
13
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(5) LONG-TERM DEBT (concluded)
The Company paid a facility fee equal to 3/8% of the initial borrowing
base and is required to pay 3/8% on any future increase in the borrowing base
within five days of written notice. The Company is required to pay a quarterly
commitment fee on the unused portion of the borrowing base of one-half percent
if the outstanding loan balance plus letters of credit are greater than 50% of
the borrowing base or three-eighths percent if the outstanding loan balance plus
letters of credit are less than or equal to 50% of the borrowing base. The
Company is required to pay a letter of credit fee on the date of issuance or
renewal of each letter of credit equal to the greater of $500 or one and
one-half percent of the face amount of the letter of credit.
The Company has granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties.
The $100 million Revolver requires, among other things, a cash flow
coverage ratio of 1.25 to 1.00 and a current ratio, excluding current maturities
of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis.
As of September 30, 1998 the Company was in violation of the cash flow covenant,
with cash flow coverage of 0.66. The Company has received a waiver from the
Banks for the twelve months ending September 30, 1999.
Under the terms of the $100 million Revolver, when mortgaged properties
are sold the borrowing base shall be reduced, and if necessary, proceeds from
the sales of properties shall be applied to the debt outstanding in an amount
equal to the loan value attributable to such properties sold. Of the total
proceeds received from property sales, $2,145,000 was used to repay principal on
the $100 million Revolver (See Note 11).
The $100 million Revolver includes other covenants prohibiting cash
dividends, distributions, loans, advances to third parties in excess of
$100,000, or sales of assets greater than 10% of the aggregate net present value
of the oil and gas properties in the borrowing base.
14
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(6) SERIES A PREFERRED STOCK
On September 4, 1996, the Company signed a stock purchase agreement with
Kaiser Francis Oil Company ("Kaiser-Francis"). Kaiser-Francis agreed to purchase
1,666,667 shares of Series A Preferred Stock ("Series A") at $6.00 per share,
for a total investment of $10,000,000. The parties agreed to a five-year
purchase period, effective September 4, 1996, with minimum incremental
investments of $500,000 each. Each issuance of Series A was subject to approval
by Kaiser-Francis of the use of proceeds. The Series A was nonvoting and accrued
dividends at 8% per annum, payable quarterly in cash. The Series A was
convertible at any time after issuance into shares of common stock at the rate
of two shares of common stock for each share of Series A before January 1, 1998.
The conversion rate decreases for every full year (excluding partial years)
thereafter at 8% per annum. As of December 31, 1997, 1,666,667 shares of the
Series A had been issued. On January 31, 1998 Kaiser-Francis converted 100% of
the Series A into 3,333,334 common shares of the Company.
(7) SERIES B PREFERRED STOCK
In connection with the merger with Shore Oil Company, effective
September 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 was junior to the Series A
Preferred. For a period of sixty-six months subsequent to September 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 a portion of their Series B shares based on a conversion method whereby
a number of convertible Series B shares are exchanged using the Alternative
Conversion Factor, which is calculated as the increase in value of approximately
40,000 net mineral acres in South Louisiana owned by the Company at the end of
the year divided by $8 million.
15
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(7) SERIES B PREFERRED STOCK (concluded)
The Alternative Conversion Factor is then multiplied by 1,066,000 to
arrive at the potential converted number of common shares received. 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.
(8) COMMON STOCK
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 September 30, 1998.
On January 13, 1998, the Board of Directors granted options, with an exercise
price of $5.75 per share, to acquire 232,000 shares of Company common stock to
certain employees and directors. On May 30, 1997, the Board of Directors granted
options, with an exercise price of $7.75 per share, to acquire 85,000 shares of
Company common stock to certain key employees. On February 6, 1997, the Board of
Directors granted options, with an exercise price of $6.00 per share, to acquire
210,000 shares of Company common stock to key employees and non-employee
directors. On May 31, 1996, the Board of Directors granted options, with an
exercise price of $2.50 per share, to acquire 125,000 shares of Company common
stock to key employees and non-employee directors. All of the options were
granted under the 1995 Stock Option and Stock Appreciation Rights Plan at fair
market value and will expire ten years from date of grant if not exercised.
On September 15, 1998, the Company entered into a consulting agreement with
Edward K. Andrew ("Andrew") for a term of five years beginning January 1, 1999.
As compensation the Company granted to Andrew a warrant to purchase 75,000
shares of common stock at a price of $5.00 per share.
16
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(9) INCOME TAXES
The Company's income tax benefit for continuing operations consists of
the following:
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30 Sept 30
1998 1997
----------- ------
<S> <C> <C>
Current $ - $ -
Deferred (1,270,914) -
----------- ------
Total $(1,270,914) $ -
----------- ------
----------- ------
</TABLE>
The Company's net deferred tax liability at September 30, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Sept 30 Dec 31
1998 1997
---------- ------------
<S> <C> <C>
Deferred tax liability
Oil and gas properties $ 4,740,702 $ 5,906,070
Deferred tax asset
NOL carryforward (1,189,043) (1,083,324)
AMT tax credit carryforward (36,482) (36,482)
Other (5,736) (5,736)
---------- ------------
(1,231,261) (1,125,542)
Valuation allowance - -
---------- ------------
Net deferred tax liability $3,509,441 $ 4,780,528
---------- ------------
---------- ------------
</TABLE>
As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $3,186,247 expiring in the years 2009 through
2011.
17
<PAGE>
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(10) COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of certain operating leases for
office space that expire over the next three years. The Company is leasing 3,000
square foot of office space for its Midcontinent office in Wichita, Kansas for
$3,000 per month for three years ending February 2000. The Company is leasing
5,363 square foot of office space for its headquarters in Houston, Texas. The
twenty-four month lease requires monthly lease payments of $5,791 through
September 30, 1998 and $6,576 through September 30, 1999.
As of September 30, 1998 the Company had $550,432 of irrevocable standby
letters of credit due to expire on September 30, 1999.
Enex, as general partner of the Enex Partnership, is contingently liable
for all debts and actions of the Enex Partnership. However, in management's
opinion, the existing assets of the Enex Partnership are sufficient to satisfy
any such partnership indebtedness.
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.
(11) NON-STRATEGIC PROPERTY SALE
On August 13, 1998 the Oil and Gas Asset Clearinghouse auctioned several
hundred oil and gas properties owned by the Company. The auctioned properties
included properties acquired in the Enex and Service Acquisitions. Certain
non-strategic properties were subject to minimum bid. The majority of the
properties were sold by auction with no minimum bids. The Company received net
proceeds of $2,635,000 from the sale of properties at the auction.
During the current period, the Company also sold certain other
non-strategic oil and gas properties in private sales for gross proceeds of
$1,860,000.
18
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Cash flow from operating activities for the current period of $2,059,000
decreased $809,000 over the comparable period. The decrease in cash flow was due
primarily to higher G&G, interest and G&A expenses, offset by increases in cash
flow from oil and gas and working capital changes. Cash flow from oil and gas
properties increased $1,087,000 over the comparable period. Oil and gas prices
decreased 37% and 10%, respectively, while oil and gas production increased 128%
and 102%, respectively. The change in working capital increased cash flow by
$1,816,000 over the comparable period. The change in working capital was caused
principally by timing differences in the payment of expenses and receipt of
revenues. The cash flow to debt coverage ratio of 0.66 is less than the 1.25
required under the $100 million Revolver agreement. The Company has received a
twelve-month default waiver effective September 30, 1998. The Company made
$1,370,000 of required principal payments under the $100 million Revolver in the
current period. During the current period, the Company made principal payments
of $2,145,000 from property sales proceeds. The Company also made a principal
payment of $1,500,000 on the $100 million Revolver ten days after the close of
the Enex tender offer.
Additions to oil and gas properties were lower than the comparable
period due primarily to the $3.5 million Riceville Acquisition in August 1997.
The amount spent on acquisitions is higher due to the Enex Acquisition that
closed March 27, 1998 and the Service Acquisition that closed April 16, 1998.
The Company acquired approximately 79% of Enex common stock for cash in a tender
offer that closed March 27, 1998. The Company also acquired substantially all of
the oil and gas assets of Service Drilling for cash and common stock. The
increase in the amount of cash used for debt payments was due to the replacing
of the $50 million Convertible Loan, with a principal balance of $10,956,000
with the $100 million Revolver and principal payments of $5,015,000 on the $100
million Revolver. No monthly principal payments were required over the period
April 1, 1997 to March 31, 1998 on the Company's $6 million, $15 million and $50
million Convertible Loans. The increase in the proceeds from debt issued was due
to proceeds from the $100 million Revolver which were used to replace the $50
million Convertible Loan, to finance the Enex Acquisition and to partially
finance the Service Acquisition. No preferred stock was issued in the current
period versus the $9 million issued under the Preferred Stock Agreement with
Kaiser-Francis in the comparable period. Kaiser-Francis converted all of the
Series A Preferred Stock on January 31, 1998.
19
<PAGE>
The Company's operating activities provided net cash of $2,059,000 for
the current period. During this period, net cash from operations, cash from
property sales and cash on hand was used principally for acquisitions and
exploratory and developmental drilling. Approximately $149,000 was spent to
acquire a well in the Spivey Field. Approximately $171,000 was spent on
leasehold and legal costs on the Hawkins Ranch Prospect. Approximately
$1,038,000 was spent on exploratory drilling and approximately $1,945,000 was
spent on developmental drilling. The principal exploratory wells in the current
period were the S. Highbaugh Prospect ($199,000), the Galloway Prospect
($148,000) and the Sherburne Prospect ($416,000). The principal developmental
wells drilled in the current period were the Kuehling #1 sidetrack ($529,000) in
the Esther Field, several wells in the Lake Trammel Field ($207,000), a workover
on a well in the Abbeville Field ($245,000), a workover on the Baker well in the
Riceville Field ($104,000) and workovers in the Spivey ($111,000) and Wellman
($124,000) Fields. Additional developmental drilling was done in the Convis,
Custer City and Loco Hills Fields. The Company spent approximately $15,960,000
on the Enex Acquisition which was financed entirely with debt proceeds from the
$100 million Revolver. The Company spent approximately $6,500,000, excluding
post-closing adjustments, on the cash portion of the Service Acquisition,
$1,000,000 from cash on hand and the remainder with proceeds from the $100
million Revolver. Amounts spent on debt retirement consisted principally of the
replacement of the $50 million convertible loan. The Company paid approximately
$778,000 in cash distributions to the minority interest partners in the Enex
Partnership for the six-month period ending September 30. Cash spent on
furniture, fixtures and other assets consists principally of costs related to
the ongoing work on the Enex and Enex Partnership mergers, computer equipment
and software.
The Company had current assets of $6,797,000 and current liabilities of
$6,915,000, which resulted in working capital deficit of $118,000 as of
September 30, 1998. This was a decrease of $1,431,000 from the working capital
of $1,313,000 as of December 31, 1997. Working capital decreased primarily due
to the higher current maturity of long-term debt and higher accounts payable.
The current maturity of long-term debt increased because the amount of debt
outstanding increased in connection with the Enex and Service Acquisitions.
Accounts payable increased because of the increased number of properties and
increased drilling activity. The Company's current ratio of 1.46, calculated
under the terms of the $100 million Revolver agreement, which excludes and
current maturities of debt due under the $100 million Revolver, was in excess of
the 0.90 to 1.00 required.
20
<PAGE>
BLOWOUT ON LOUIS MAYARD #1 WELL IN ESTHER FIELD
The Company owns a 100% working interest in the Louis Mayard #1 well
located in Vermillion Parish, Louisiana. The Louis Mayard #1 (the "well") had
been shut in and the Company began a recompletion attempt on or about August 6,
1998. On August 11, 1998, an attempt to kill the well was made and it was
determined that the tubing and intermediate casing had failed resulting in an
uncontrolled underground flow. Due to the inability of the Company to shut in
the well using regular methods, special crews were called in to gain control of
the well. The well was shut in on or about October 9, 1998. The costs incurred
by the Company, through September 30, to gain control of the well were
approximately $1,404,000. The Company has a $3.0 million control of well
insurance policy that will reimburse the Company for the costs incurred to
regain control of the well. On November 4 the insurance company made a partial
payment to the Company of approximately $1,408,000.
ABANDONMENT ACCRUALS
In the current period the Company estimated abandonment accruals
amounting to approximately $485,000. An abandonment accrual of $450,000 was made
for certain properties located in Florida. These properties were acquired in the
Enex Acquisition and will be plugged and abandoned in the fourth quarter of
1998.
NON-STRATEGIC PROPERTY SALE
On August 13, 1998 the Oil and Gas Asset Clearinghouse auctioned several
hundred oil and gas properties owned by the Company. The auctioned properties
included properties acquired in the Enex and Service Acquisitions. Certain
non-strategic properties were subject to minimum bid. The majority of the
properties were sold by auction with no minimum bids. The Company received net
proceeds of $2,635,000 from the sale of properties at the auction.
During the current period, the Company also sold certain other
non-strategic oil and gas properties in private sales for gross proceeds of
$1,860,000.
Under the terms of the $100 million Revolver, when mortgaged properties
are sold the borrowing base shall be reduced, and if necessary, proceeds from
the sales of properties shall be applied to the debt outstanding in an amount
equal to the loan value attributable to such properties sold. Of the total
proceeds received from property sales, $2,145,000 was used to repay principal on
the $100 million Revolver.
21
<PAGE>
$100 MILLION LINE OF CREDIT
In conjunction with the Enex Acquisition on March 27, 1998 the Company
entered into a new debt agreement with the Banks. The new debt agreement is a
$100 million reducing, revolving line of credit (the "$100 million Revolver")
with current borrowings under a term note maturing April 1, 2001. The entire
principal balance of the Company's $50 million Convertible Loan at the Bank of
Oklahoma was replaced with the $100 million Revolver. The Bank of Oklahoma is a
participating lender with Compass Bank.
The $100 million Revolver provided for an initial borrowing base of $29
million. The initial borrowing base was reduced to $27.5 million within ten days
after the effective date and further reduced by $275,000 per month, beginning
May 1, 1998 and ending October 1, 1998. In conjunction with the Service
Acquisition, the borrowing base was increased to $32,600,000 and the monthly
borrowing base reductions were increased to $330,000. Effective October 1, 1998,
the semi-annual borrowing base redetermination date, the borrowing base was
calculated to be approximately $28.9 million with monthly borrowing base
reductions of $250,000 beginning November 1, 1998. Effective January 1, 1999,
the borrowing base determined at October 1, 1998 will be adjusted to $25.4
million if the Company does not successfully complete the Enex Partnership
Merger. If the Company successfully completes the Enex Partnership Merger, the
borrowing base determined at October 1, 1998 will be readjusted to $33.1 million
and the monthly borrowing base reduction will be increased to $290,000
The borrowing base and the scheduled reduction amount shall be redetermined
semi-annually by unanimous consent of the lenders beginning October 1, 1998. The
principal is due at maturity, April 1, 2001. Monthly principal payments are made
as required in order that the outstanding principal balance does not exceed the
borrowing base. Interest is payable monthly and is calculated at the prime rate.
The Company may elect to calculate interest under the Libor rate, as defined in
the agreement. The Libor rate increases by (a) 2.00% if the outstanding loan
balance and letters of credit are equal to or greater than 75% of the borrowing
base, (b) 1.75% if the outstanding loan balance and letters of credit are less
than 75% or greater than 50% of the borrowing base, (c) 1.50% if the outstanding
loan balance and letters of credit are equal to or less than 50% of the
borrowing base. Libor interest is payable at maturity of the Libor loan which
cannot be less than thirty days.
At September 30, 1998 the Company had $27,454,000 outstanding under the
$100 million Revolver and approximately $550,000 of outstanding letters of
credit. As of September 30, 1998, the Company is paying Libor plus 2.00% on a
sixty day Libor loan for $25,470,000 and prime on $1,984,000.
The Company paid a facility fee equal to 3/8% of the initial borrowing
base and is required to pay 3/8% on any future increase in the borrowing base
within five days of written notice. The Company is required to pay a quarterly
commitment fee on the unused portion of the borrowing base of one-half percent
if the outstanding loan balance plus letters of credit are greater than 50% of
the borrowing base or three-eighths percent if the outstanding loan balance plus
letters of credit are less than or equal to 50% of the borrowing base. The
Company is required to pay a letter of credit fee on the date of issuance or
renewal of each letter of credit equal to the greater of $500 or one and
one-half percent of the face amount of the letter of credit.
22
<PAGE>
The Company has granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties.
The $100 million Revolver requires, among other things, a cash flow
coverage ratio of 1.25 to 1.00 and a current ratio, excluding the current
maturity of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly
basis. As of September 30, 1998 the Company was in violation of the cash flow
covenant, with cash flow coverage of 0.66. The Company has received a waiver
from the Banks for the twelve months ending September 30, 1999.
Under the terms of the $100 million Revolver, when mortgaged properties
are sold the borrowing base shall be reduced, and if necessary, proceeds from
the sales of properties shall be applied to the debt outstanding in an amount
equal to the loan value attributable to such properties sold. Of the total
proceeds received from property sales, $2,145,000 was used to repay principal on
the $100 million Revolver.
The $100 million Revolver includes other covenants prohibiting cash
dividends, distributions, loans, advances to third parties in excess of
$100,000, or sales of assets greater than 10% of the aggregate net present value
of the oil and gas properties in the borrowing base.
SERIES B PREFERRED STOCK
In connection with the Shore Merger, effective September 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 was junior to the Series A Preferred. For a period
of sixty-six months subsequent to September 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 a portion of their
Series B shares based on a conversion method whereby a number of convertible
Series B shares are exchanged using the Alternative Conversion Factor, which is
calculated as the increase in value of approximately 40,000 net mineral acres in
South Louisiana owned by the Company at the end of the year divided by $8
million.
The Alternative Conversion Factor is then multiplied by 1,066,000 to
arrive at the potential converted number of common shares received. 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.
As of September 30, 1998, no additional shares of Series B have been
issued.
23
<PAGE>
STOCK PURCHASE AGREEMENT
On September 4, 1996, the Company signed a stock purchase agreement with
Kaiser Francis Oil Company ("the Agreement"). The Agreement provides for the
purchase of 1,666,667 shares of Series A Preferred Stock ("Series A") at
$6.00 per share, over a five-year period beginning September 4, 1996 with
minimum incremental investments of $500,000 each. Each issuance of Series A
is subject to approval by Kaiser-Francis of the use of proceeds. The Series A
is nonvoting and accrues dividends at 8% per annum, payable quarterly in
cash. The Series A 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. At December 31, 1997, all of the Series A
had been issued and on January 31, 1998, all of the Series A was converted.
THE ENEX ACQUISITION
On March 27, 1998, the Company acquired 1,064,032 shares of the common
stock of Enex, for $15 cash per share pursuant to the Company's tender offer
that began February 19, 1998. The Enex shares acquired by the Company represent
79.2% of the total outstanding Enex common stock. The Company applied the
purchase method of accounting to the Enex Acquisition. The purchase price of
$15,960,480 was financed with proceeds from the Company's $100 million Revolver.
The Company also incurred approximately $60,934 in legal, accounting and
printing expenses and issued 33,825 shares of Company common stock for finders
fees to unrelated third parties.
As part of the Enex Acquisition, the Company entered into an agreement,
effective April 15, 1998, with the former president of Enex that provides for
monthly payments of $20,000 until expiration of the agreement on May 18, 2002.
The present value of the agreement, applying a 10% discount rate, is
approximately $788,000 and is included in Other Liabilities (current and long
term). The monthly payments serve as consideration for consulting, a covenant
not to compete and a preferential right to purchase certain oil and gas
acquisitions which the former president controls or proposes to acquire during
the term of the agreement. The Company will reimburse the former president each
month for reasonable and necessary business expenses incurred in connection with
the performance of consulting services. The agreement survives the former
president and his spouse and is nonassignable.
Enex, a Delaware corporation, is an independent oil and gas production
and development company headquartered in Kingwood, Texas with operations
primarily in Texas. Enex engages primarily in managing and acquiring producing
oil and gas properties, and does not engage in significant drilling activities.
Enex operates over 100 wells in South Texas. Before the tender offer, the Enex
shares traded on the NASDAQ Stock Market National Market System under the symbol
ENEX. The Enex shares are currently traded on the OTC Bulletin Board. Concurrent
with the closing of the Enex Acquisition, the Enex Board of Directors resigned
and were replaced by the persons who constitute the Company's Board of
Directors. Enex is presently being operated as a majority-owned subsidiary of
the Company.
24
<PAGE>
In addition to managing and acquiring direct interests in producing oil
and gas properties, Enex serves as general partner of the Enex Partnership. The
Enex Partnership is a New Jersey limited partnership that was formed on
September 30, 1997 from the combination of thirty-four Enex Oil and Gas Limited
Partnerships. The Enex Partnership, also headquartered in Kingwood, Texas, is
engaged in the oil and gas business through the ownership of various interests
in oil and gas properties. Approximately 73% of Enex's estimated future net
revenues from proved reserves at December 31, 1997 is attributable to its
interests in the Enex Partnership and approximately 27% is attributable to the
properties owned directly by the Company, after deducting the minority interest
share of the Enex Partnership. As general partner, Enex has a 4.1% interest in
the net revenues and gains generated by properties owned by the Enex
Partnership. In addition to the general partner interest, Enex owns a 56.2%
limited partner interest in the Enex Partnership.
The Enex Partnership makes periodic cash distributions to the limited
partners. The distributions for the nine months ended September 30, 1998 and the
years ended 1997 and 1996 were approximately $3.6 million, $4.5 million and $2.4
million, respectively. Considering its general and limited partner interest,
Enex's total interest in the Enex Partnership is approximately 57.99%. Based on
the Company's 79.2% ownership of Enex, the Company has an effective ownership of
the Enex Partnership of 45.9%
Because the Company's ownership of Enex is greater than 50%, the
Company's consolidated financial statements at September 30, 1998 include 100%
of the accounts of Enex and the Enex Partnership. Enex consolidates 100% of the
Enex Partnership on its books for financial reporting purposes because its
ownership in the Enex Partnership is greater than 50%. The minority interest on
the Company's books reflects the equity interest of the minority partners in
Enex (20.8%) and the minority partners in the Enex Partnership (43.8%).
Subsequent to the Enex Acquisition, the Company has filed registration
statements under the Securities Act of 1933 for the Enex Merger and for the Enex
Partnership Merger. The registration statement for the Enex Merger was declared
effective on July 17, 1998 and special stockholders' meeting was held on August
20, 1998 to approve the merger. Due to adverse market conditions, the Company
voted against the Enex Merger. The Company has a preliminary registration
statement on file for the Enex Partnership Merger. As of September 30, 1998 the
Company has capitalized approximately $313,000 in legal, accounting and other
fees for preparation of the registration statements for the Enex and the Enex
Partnership Mergers. Due to the postponement of the Enex Merger, the Company
impaired the capitalized deal costs related to the Enex Merger of approximately
$30,000.
On October 31, 1998 the office lease in Kingwood where Enex and the Enex
Partnership were headquartered expired. The Company has moved the majority of
the current files and records for Enex and the Enex Partnership to the Houston
office and has rented a small office in Kingwood where the accounting staff of
Enex and the Enex Partnership will continue to operate until the first quarter
of 1999.
The operations of Enex and the Enex Partnership for the six months and
three months ended September 30, 1998 were included in the financial statements
of the Company.
25
<PAGE>
FUTURE CAPITAL REQUIREMENTS
The Company has made and will continue to make, substantial capital
expenditures for acquisition, development and exploration of oil and natural gas
reserves. In fact, because the Company's principal natural gas and oil reserves
are depleted by production, its success is dependent upon the results of its
acquisition, development and exploration activities.
The Company expects to incur a minimum of approximately $1,000,000 in
capital expenditures over the next twelve months. The Company expects that
available cash, cash flows from operations and cash proceeds from asset sales of
certain non-core properties will be sufficient to fund the planned capital
expenditures through 1998 in addition to funding interest and principal
requirements on the $100 million Revolver. However, the Company may require
additional borrowings under the $100 million Revolver or additional equity
funding to raise additional capital to fund any acquisitions.
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.
On October 1, 1998, the principal outstanding under the $100 million
Revolver was approximately $27.4 million and the outstanding letters of credit
was approximately $0.6 million. The borrowing base at October 1, 1998 was
calculated at approximately $28.9 million. Under the terms of the $100 million
Revolver, the borrowing base declines $330,000 in October and $250,000 monthly
beginning November 1. Effective January 1, 1999, the borrowing base determined
at October 1, 1998 will be adjusted to $25.4 million if the Company does not
successfully complete the Enex Partnership Merger. Effective January 1, 1999, if
the Company successfully completes the Enex Partnership Merger, the borrowing
base determined at October 1, 1998 will be readjusted to $33.1 million and the
monthly borrowing base reduction will be increased to $290,000. Funds spent on
debt retirement reduce the amount of cash flow available to spend on
acquisition, development and exploration activities.
By the end of the first quarter of 1999, the Company expects to have the
operations of Enex and the Enex Partnership fully consolidated into its
operations at the Company's headquarters in Houston. It is expected that the
Company will realize certain cost savings in the consolidation of these
operations.
CURRENT ACTIVITIES
As of November 11, 1998 one exploratory well was being drilled and the
Louis Mayard #1 well was in the final stages of being plugged and abandoned.
26
<PAGE>
YEAR 2000 COMPUTER ISSUE
The Company has completed its internal reviews of Year 2000 issues and
has identified three areas that, if not adequately addressed, could materially
impact the Company: (1) accounting systems and information technology systems;
(2) computer controlled and other embedded technology; and (3) third-party
compliance.
The Company has updated its accounting software so that it is Year 2000
compliant or capable of timely conversion to Year 2000 compliance for an
additional nonmaterial cost.
The Company owns or leases the pumping and other equipment necessary to
service the fields in which it serves as operator. The Company is currently
evaluating the extent to which this machinery may contain non-Year 2000
complaint embedded systems. The Company believes that a large-scale failure of
such equipment could have a negative material impact on the Company. The Company
is currently in the planning stage regarding Year 2000 issues concerning its
non-operated properties.
The Company has a material interest in a large number of fields that are
operated by third parties. The simultaneous failure of the operation of a large
number of these third-party fields could have a negative material impact on the
Company. The Company is making individual inquires as to the state of each
operator's Year 2000 preparation activities. The Company cannot, however,
accurately predict at this time how many, if any, of these third parties will
adequately address their Year 2000 issues. The Company is currently in the
assessment stage regarding Year 2000 issues concerning its operated properties.
The Company would also likely suffer a material adverse impact if its
banking institutions do not adequately address their Year 2000 issues, if any.
The Company is currently inquiring into any such issues.
The Company does not currently have a contingency plan in place
sufficient to address all Year 2000 issues related to third-party preparedness.
The Company is currently evaluating the feasibility and effectiveness of such a
plan.
The Company expects to have the all of the material Year 2000 issues,
which includes the financial impact on the Company, assessed by June 30, 1999.
27
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the current period, the revenues and expenses attributable to the
Enex and the Service Acquisition are included for the entire period. For the
prior period, the revenues and expenses attributable to the Bison and Shore
Mergers are included for the entire period.
Total revenues for the current period of $5,695,000 were $1,546,000
higher than the comparable period. The increase in total revenues was due
principally to the gain on the sale of oil and gas properties of $1,519,000.
Revenues from the sale of oil and gas were $742,000 higher than the comparable
period. The increase in oil and gas revenues was offset by an $870,000 decrease
in lease bonus and delay rental income. Other income increased by $155,000. The
increase in the gain was due to the non-strategic property sales that occurred
in the current period. No gain or loss was recorded on the Enex and Service
Acquisitions properties that were sold in the current period, the proceeds were
credited against the original acquisition cost.
The increase in oil and gas revenues consisted primarily of a $205,000
increase in oil revenues, a $510,000 increase in gas revenues and a $27,000
increase in other revenues. The increase in oil and gas revenues was the result
of higher oil and gas production. Production of oil increased 79% and production
of gas increased 54%, over the comparable period. The oil production increase of
72,000 barrels and the gas production increase of 364,000 Mcf, were due
primarily to the Riceville Acquisition which closed in August 1997 and the Enex
and Service Acquisitions which closed in 1998. During the current period, the
Company sold 163,000 barrels of oil and 1,032,000 Mcf of gas, as compared to
91,000 barrels and 668,000 Mcf for the comparable period. The average price
received on the gas sold in the current period of $1.90 per Mcf was 12% lower
than the $2.17 per Mcf received in the comparable period. The average price
received on the oil sold in 1998 of $11.35 per barrel was 37% lower than the
$18.05 per barrel received in the comparable period. A reclassification of 9,000
barrels and $132,000 in oil revenues was made in the prior period. The revenues
were previously recorded in gas plant revenues with no volumes associated with
the revenues.
During the current period, the Baker #1 well in the Riceville Field, a
major property of the Company, was shut in. The well was sidetracked and began
flowing on or about October 28. The well was selling approximately 500 barrels
of oil and 27,000 Mcf of gas per month, net to the Company, before it was shut
in.
Total expenses increased $2,231,000 over the comparable period. Due to
the growth of the Company over the last twelve months, all categories of
expenses increased except dryhole and stock compensation expenses.
Lease operating expenses increased $789,000. The increase was due
principally to the additional expenses on the properties acquired in the Enex
and Service Acquisitions that closed in 1998.
28
<PAGE>
Geological and geophysical expenses ("G&G expenses") increased by
$123,000. In the current period, the Company spent approximately $130,000 on the
Sherburne Prospect versus only $16,000 spent on other prospects in the
comparable period.
Depletion, depreciation and amortization expense increased $392,000.
Depletion was higher due to depletion on properties acquired in the Riceville
Acquisition, which closed in August 1997, and the Enex and Service Acquisitions,
which closed in 1998.
Impairment expense increased $492,000. The impairment expense in the
current period was due to an unsuccessful recompletion attempt on the
Goldberg #2 well in the Abbeville Field located in Vermillion Parish,
Louisiana. The reserves had been classified as proved behind pipe. There was
no impairment expense in the comparable period.
During the current period, dryhole expenses decreased by $186,000. No
material dry hole expenses were incurred in the current period versus
approximately $210,000 incurred in the comparable due to dry holes drilled in
the Brigham Agreement.
Interest expense increased $397,000, due primarily to a higher loan
balance.
Stock compensation expense decreased $101,000 due to the vesting period
for the restricted stock granted to certain Company employees ending in the
quarter ended June 30, 1998.
General and administrative expenses ("G&A") increased $324,000. The
increase in G&A consists primarily increases in salaries, rent, office expense
and engineering and legal expenses. The increase in salary expense was due to
increases in salaries of existing employees, salaries of new employees and
salaries of the employees of Enex. For the current period, the Company had
twenty-three full-time executive and clerical employees and five full-time Enex
employees. Since September 30, 1997, the Company hired eight employees and one
resigned. The increase in rent is due to the Company previously owning its
office in Mobile, Alabama versus renting office space since the Company's move
to Houston in November 1997. The increases in other G&A expenses are due to the
increase in the general activity of the Company's business.
The Company reported an operating loss before minority interest of
$431,000 for the current period versus operating income of $254,000 for the
comparable period. Due to the Enex Acquisition, the Company records a minority
interest on its income statement to remove the net income or loss attributable
to the minority interest holders of Enex. In the current period the minority
interest increased the operating loss by $154,000.
The Company reported a deferred income tax benefit of $199,000 in the
current period. No deferred taxes were recorded in the comparable period.
The Company reported a net loss of $386,000 for the current period
versus net income of $254,000 for the comparable period. After considering the
preferred stock dividend requirement of $204,000 in the comparable period, the
Company reported a net loss available to common stockholders in the current
period of $386,000 versus net income of $49,000 in the comparable period.
29
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the current period, the revenues and expenses attributable to the
Enex Acquisition are included for the period April through September and those
attributable to the Service Acquisition are included for the months of May
through September. For the comparable period, the revenues and expenses
attributable to the Bison Merger are included for the period March through
September and the Shore Merger are included for the period July through
September.
Total revenues for the current period of $13,260,000 were $5,358,000
higher than the comparable period. The increase in total revenues was due
principally to increases in oil and gas revenues of $4,165,000 and gain on sale
of properties of $1,523,000. During the current period lease bonus and rental
income on the mineral acreage acquired in the Shore Merger decreased $673,000.
Other revenues in the current period increased $343,000. The increase in the
gain was due to the non-strategic property sales that occurred during the
current period. No gain or loss was recorded on the Enex and Service
Acquisitions properties that were sold in the current period, the proceeds were
credited against the original acquisition cost.
The increase in oil and gas revenues consisted primarily of a $1,547,000
increase in oil revenues, a $2,511,000 increase in gas revenues and a $107,000
increase in other revenues. The increase in oil and gas revenues was the result
of higher oil and gas production. Production of oil increased 128% and
production of gas increased 102%, over the comparable period. The oil production
increase of 239,000 barrels and the gas production increase of 1,370,000 Mcf,
were due primarily to the Bison and Shore Mergers and the Riceville Acquisition
which closed in 1997 and the Enex and Service Acquisitions which closed in 1998.
During the current period, the Company sold 428,000 barrels of oil and 2,713,000
Mcf of gas, as compared to 188,000 barrels and 1,343,000 Mcf for the comparable
period. The average price received on the gas sold in the current period of
$2.04 per Mcf was 10% lower than the $2.26 per Mcf received in the comparable
period. The average price received on the oil sold in 1998 of $11.91 per barrel
was 37% lower than the $18.87 per barrel received in the comparable period. A
reclassification of 21,000 barrels and $308,000 in oil revenues was made in the
prior period. The revenues were previously recorded in gas plant revenues with
no volumes associated with the revenues.
During the current quarter, the Baker #1 well in the Riceville Field, a
major property of the Company, was shut in. The well was sidetracked and began
flowing on or about October 28. The well was selling approximately 500 barrels
of oil and 27,000 Mcf of gas per month, net to the Company, before it was shut
in.
Total expenses increased $9,161,000 over the comparable period. Due to
the growth of the Company, all categories of expenses increased, except dryhole
and stock compensation expenses.
Lease operating expenses increased $3,078,000. The increase was due
principally to the additional expenses on the properties acquired in the Bison
and Shore Mergers which closed in 1997 and the Enex and Service Acquisitions
which closed in 1998.
30
<PAGE>
Geological and geophysical expenses ("G&G expenses") increased $796,000.
In the current period, the Company spent approximately $781,000 on the Hawkins
Ranch Prospect and $132,000 on the Sherburne Prospect versus approximately
$131,000 in the comparable period.
Depletion, depreciation and amortization expense increased $2,363,000.
Depletion was higher due to depletion on properties acquired in the Bison and
Shore Mergers and the Riceville Acquisition, which closed in 1997, and the Enex
and Service Acquisitions, which closed in 1998.
Impairment expense increased $492,000. The impairment expense in the
current period was due to an unsuccessful recompletion attempt in the current
quarter on the Goldberg #2 well in the Abbeville Field located in Vermillion
Parish, Louisiana. The reserves had been classified as proved behind pipe. There
was no impairment expense in the comparable period.
During the current period, dryhole expenses decreased by $115,000. In
the current period the dryhole expense of $331,000 consisted principally of
$199,000 for the dryhole on the South Highbaugh Prospect and additional dryhole
expenses of $102,000 on two dryholes on the Reflection Ridge Prospect. Dryhole
expenses in the comparable period consisted principally of costs through the
Brigham Agreement.
Interest expense increased $951,000, due primarily to a higher loan
balance.
Stock compensation expense decreased $34,000 due to the vesting period
for the restricted stock granted to certain Company employees ending in the
quarter ended June 30, 1998.
General and administrative expenses ("G&A") increased $1,631,000. The
increase in G&A consists primarily of increases in salaries, performance bonuses
for the previous year, engineering, accounting and legal expenses, rent expense
and office expense. The increase in salary expense was due to increases in
salaries of existing employees, salaries of new employees, salaries associated
with employees added in the Bison and Shore Mergers and salaries associated with
the Enex employees. For the current period, the Company had twenty-three
full-time executive and clerical employees and five Enex employees. Eight
employees were added through the Bison and Shore mergers and the Company hired
eight employees and one resigned. The increase in rent is due to the Company
previously owning its office in Mobile, Alabama versus renting office space
since the Company's move to Houston in November 1997. The increases in other G&A
expenses are due to the increase in the general activity of the Company's
business.
The Company reported an operating loss before minority interest of
$3,738,000 for current period versus operating income of $70,000 for the
comparable period. Due to the Enex Acquisition, the Company records a minority
interest on its income statement to remove the net income or loss attributable
to the minority interest holders of Enex. In the current period the minority
interest increased the operating loss by $5,000.
31
<PAGE>
The Company reported a deferred income tax benefit of $1,271,000 in the
current period. No deferred taxes were recorded in the comparable period.
The Company reported a net loss of $2,467,000 for the current period
versus net income of $70,000 for the comparable period. After considering the
preferred stock dividend requirement of $68,000 in the current period versus
$409,000 in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $2,535,000 and
$338,000, respectively.
32
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed with this report
(b) On July 6, 1998, the Company filed a report on Form 8-K/A, as an
amendment to the original 8-K filed May 4, 1998, under Item 7 providing the
financial statements, pro forma information and exhibits describing the
Company's acquisition of substantially all of the oil and gas assets of Service
Drilling Co., LLC.
On August 28, 1998, the Company filed a report on Form 8-K under Item 5
describing the special shareholders meeting held by Enex Resources Corporation
("Enex") on August 20, 1998 to vote on the merger between Enex and the Company.
At the meeting, the Company voted its shares against approval of the merger. The
Company and Enex had previously agreed to terminate the merger agreement due to
adverse economic conditions.
33
<PAGE>
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 17, 1998 By: /s/ Frank C. Turner II
----------------------------------
Frank C. Turner II
Vice-President and
Chief Financial Officer
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS--BALANCE SHEETS AT SEPTEMBER 30, 1998 (UNAUDITED) AND THE
STATEMENTS OF OPERATIONS AT SEPTEMBER 30, 1998 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,288,537
<SECURITIES> 0
<RECEIVABLES> 4,135,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,796,987
<PP&E> 91,020,255
<DEPRECIATION> (32,863,730)
<TOTAL-ASSETS> 65,653,579
<CURRENT-LIABILITIES> 6,915,051
<BONDS> 0
0
3,627,000
<COMMON> 171,047
<OTHER-SE> 38,272,127
<TOTAL-LIABILITY-AND-EQUITY> 65,653,579
<SALES> 11,078,360
<TOTAL-REVENUES> 13,259,754
<CGS> 5,539,218
<TOTAL-COSTS> 5,539,218
<OTHER-EXPENSES> 11,452,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,428,633
<INCOME-PRETAX> (3,737,983)
<INCOME-TAX> (1,270,914)
<INCOME-CONTINUING> (2,467,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,535,014)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
