<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 June 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 July 31, 1998
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-
June 30, 1998 and December 31, 1997 ....................... 1
Consolidated Statements of Operations-
Six months ended June 30, 1998 and 1997 ................... 2
Consolidated Statements of Cash Flows-
Six months ended June 30, 1998 and 1997 ................... 3
Notes to Consolidated Financial Statements ................... 4
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operation ..... 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Stockholders ........................................ 29
Item 6. Exhibits and Reports on Form 8-K ....................... 30
</TABLE>
<PAGE> 3
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30 DECEMBER 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 2,061,612 $ 1,587,184
NOTES AND ACCOUNTS RECEIVABLE- TRADE 3,193,811 2,352,679
OTHER CURRENT ASSETS 439,401 57,726
ASSETS HELD FOR RESALE 1,947,135 206,464
------------ ------------
TOTAL CURRENT ASSETS 7,641,959 4,204,053
NON-CURRENT ASSETS
NOTES RECEIVABLE- STOCKHOLDER 169,640 166,165
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 91,719,370 62,685,623
FURNITURE, FIXTURES AND OTHER 916,524 822,806
------------ ------------
92,635,894 63,508,429
ACCUMULATED DEPRECIATION AND DEPLETION (32,404,946) (30,636,202)
------------ ------------
60,230,948 32,872,227
OTHER ASSETS 200,115 10,127
------------ ------------
TOTAL ASSETS $ 68,242,662 $ 37,252,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT $ 4,091,535 $ 1,375,537
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,454,476 1,176,680
OIL AND GAS REVENUE PAYABLE 378,632 308,981
OTHER CURRENT LIABILITIES 316,308 29,737
------------ ------------
TOTAL CURRENT LIABILITIES 7,240,951 2,890,935
LONG-TERM DEBT 26,628,604 9,714,713
DEFERRED INCOME TAXES 3,708,668 4,780,528
OTHER LIABILITIES 521,594 -
MINORITY INTEREST 7,034,094 -
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 10,000,000 and 5,000,000 AUTHORIZED AT
JUNE 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 JUNE 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 JUNE 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
JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY 171,047 90,392
PAID-IN-CAPITAL 38,272,126 23,029,299
UNEARNED STOCK COMPENSATION - (67,500)
ACCUMULATED DEFICIT (18,893,382) (16,744,755)
LESS COST OF TREASURY STOCK; 21,773 SHARES (68,040) (68,040)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,108,751 19,866,396
COMMITMENTS AND CONTINGENCIES
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,242,662 $ 37,252,572
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
OIL AND GAS SALES AND PLANT INCOME $ 4,484,670 $ 1,818,251 $ 7,116,918 $ 3,694,098
GAIN ON SALE OF PROPERTY 9,068 3,867 9,068 3,867
LEASE BONUS & DELAY RENTAL INCOME 197,071 - 197,071 -
OTHER 117,295 29,290 241,937 54,821
------------ ------------ ------------ ------------
TOTAL REVENUE 4,808,104 1,851,408 7,564,994 3,752,786
------------ ------------ ------------ ------------
COSTS AND EXPENSES
WELL OPERATING 2,420,967 678,038 3,605,015 1,316,681
GEOLOGICAL AND GEOPHYSICAL 42,402 110,986 788,115 115,191
DEPRECIATION, DEPLETION AND
AMORTIZATION 1,906,806 575,772 3,024,942 1,054,817
DRYHOLE (161,687) 54,381 307,264 235,719
INTEREST 557,388 123,868 812,841 259,743
STOCK COMPENSATION 33,750 - 67,500 -
GENERAL AND ADMINISTRATIVE 1,167,150 531,846 2,260,553 953,700
------------ ------------ ------------ ------------
TOTAL EXPENSES 5,966,776 2,074,891 10,866,230 3,935,851
LOSS BEFORE MINORITY INTEREST
AND INCOME TAXES (1,158,672) (223,483) (3,301,236) (183,065)
MINORITY INTEREST (148,686) - (148,686) -
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,009,985) (223,483) (3,152,549) (183,065)
INCOME TAX BENEFIT (343,395) - (1,071,867) -
------------ ------------ ------------ ------------
NET LOSS (666,591) (223,483) (2,080,683) (183,065)
DIVIDENDS TO PREFERRED STOCKHOLDERS - 141,556 67,945 204,445
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO STOCKHOLDERS ($ 666,591) ($ 365,039) ($ 2,148,628) ($ 387,510)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 8,530,592 2,553,791 7,625,124 2,321,088
============ ============ ============ ============
Diluted 8,530,592 2,553,791 7,625,124 2,321,088
============ ============ ============ ============
NET LOSS PER COMMON SHARE
Basic ($ 0.08) ($ 0.14) ($ 0.28) ($ 0.17)
============ ============ ============ ============
Diluted ($ 0.08) ($ 0.14) ($ 0.28) ($ 0.17)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
MIDDLE BAY OIL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
UNAUDITED
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET LOSS ($ 2,080,683) ($ 183,065)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION 3,024,942 1,054,817
DRYHOLE COSTS 307,264 235,719
STOCK COMPENSATION EXPENSE 67,500 -
GAIN ON SALE OF PROPERTIES (9,068)
DEFERRED INCOME TAX BENEFIT (1,071,867) -
MINORITY INTEREST (148,686)
CHANGES IN CURRENT ASSETS AND LIABILITIES EXCLUDING
EFFECTS OF BUSINESS ACQUISITIONS:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS 349,860 55,262
ACCOUNTS PAYABLE, OIL AND GAS REVENUE PAYABLE,
AND OTHER CURRENT LIABILITIES 693,861 220,931
OTHER CHARGES (CREDITS) - (91,498)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,133,123 1,292,166
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 508,963 1,445,890
ADDITIONS TO OIL AND GAS PROPERTIES (2,198,350) (1,643,721)
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 (6,313,373)
FURNITURE, FIXTURES AND OTHER ASSETS (332,749) (24,412)
ADVANCES TO STOCKHOLDER (3,474) (3,314)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (19,668,186) (7,879,770)
FINANCING ACTIVITIES
PROCEEDS FROM COMMON STOCK ISSUED - 143,692
PROCEEDS FROM PREFERRED STOCK ISSUED - 9,000,000
PROCEEDS FROM DEBT ISSUED 32,469,604 664,702
PRINCIPAL PAYMENTS ON DEBT (12,839,713) (388,782)
PREFERRED STOCK DIVIDENDS (67,945) (204,445)
PARTNERSHIP DISTRIBUTIONS (416,736)
OTHER (135,719) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,009,491 9,215,167
NET INCREASE IN CASH 474,428 2,627,563
CASH- BEGINNING 1,587,184 556,026
------------ ------------
CASH- ENDING $ 2,061,612 $ 3,183,589
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH $ 766,159 $ 259,743
============ ============
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 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 June 30, 1998 and December 31, 1997 and the consolidated
results of operations and consolidated cash flows for the periods ended June 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 a partnership, of which Enex owns greater than a 50% interest.
The equity of minority interests in Enex and the partnership is shown in the
consolidated statements as "minority interest". Significant intercompany
accounts and transactions are eliminated in consolidation.
4
<PAGE> 7
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 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 June 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> 8
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 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.
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 required by the Statement of Financial Accounting Standards No.
109. 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> 9
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 392,108 and 393,677
common stock equivalents are not considered in the 1998 calculation of diluted
earnings per share for the six month and three month periods ending June 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> 10
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 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 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 was merged into the Company on
January 1, 1998.
8
<PAGE> 11
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 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> 12
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(2) ACQUISITIONS (concluded)
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.
10
<PAGE> 13
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(2) ACQUISITIONS (concluded)
The following pro forma data presents the results of the Company for
the six months ended June 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
---------
Six months ended
----------------
June 30
-------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Total Revenues ............................................................................. $ 11,094 $ 13,881
Net Income (Loss) Available to Stockholders ................................................ $ (2,575) $ 315
Net Income (Loss) per Share
Available to Stockholders................................................................ $ (0.32) $ 0.08
</TABLE>
(3) 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 June 30, 1998 and December 31, 1997 in
the amount of $169,640 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 six months
ended June 30, 1998 and 1997, BCEG did not make any payments and was not
advanced any funds. Interest of $30,635 was accrued on the note at June 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.
11
<PAGE> 14
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
June 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 $30,588,605 --
Convertible Loan of $50,000,000 due June 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 June 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% 131,534 133,952
----------- -----------
Total $30,720,139 $11,090,250
Less current maturities 4,091,535 1,375,537
----------- -----------
Long-term debt excluding current
maturities $26,628,604 $ 9,714,713
=========== ===========
</TABLE>
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 $32,600,000 and the monthly
borrowing base reductions were increased to $330,000. The borrowing base and the
scheduled reduction amount shall be redetermined semi-annually by unanimous
consent of the lenders beginning October 1, 1998.
12
<PAGE> 15
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(4) LONG-TERM DEBT (continued)
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 June 30, 1998 the Company had borrowed approximately $30,588,605 and
had approximately $1,350,432 of outstanding letters of credit. As of June 30,
1998, the Company is paying Libor plus 2.00% on a sixty day Libor loan for
$25,469,605 and a thirty day Libor loan for $4,500,000, and prime on $619,000.
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.
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 and the current receivable from BCEG, of 0.9 to 1.00,
determined on a quarterly basis.
13
<PAGE> 16
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(4) LONG-TERM DEBT (concluded)
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. As of June 30, 1998 the
Company was not in violation of any covenants of the $100 million Revolver.
(5) 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.
(6) SERIES B PREFERRED STOCK
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 was junior to the Series A Preferred.
For a period of sixty-six 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 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.
14
<PAGE> 17
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(6) 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.
(7) 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 June 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.
15
<PAGE> 18
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(8) INCOME TAXES
The Company's income tax benefit for continuing operations consists of the
following:
<TABLE>
<CAPTION>
Six Months Ended
June 30 June 30
1998 1997
---- ----
<S> <C> <C>
Current $ - $ -
Deferred (1,071,867) -
----------- ----
Total $(1,071,867) $ -
=========== ====
</TABLE>
The Company's net deferred tax liability at June 30, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability
Oil and gas properties $ 5,478,845 $ 5,906,070
Deferred tax asset
NOL carryforward (1,727,959) (1,083,324)
AMT tax credit carryforward (36,482) (36,482)
Other (5,736) (5,736)
----------- -----------
(1,770,177) (1,125,542)
Valuation allowance -- --
----------- -----------
Net deferred tax liability $ 3,708,668 $ 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.
16
<PAGE> 19
MIDDLE BAY OIL COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(9) 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. 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 June 30, 1998 and $6,576
through June 30, 1999.
As of June 30, 1998 the Company had $1,350,432 of irrevocable standby
letters of credit due to expire on June 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.
(10) SUBSEQUENT EVENTS
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 Resources Corporation ("Enex") into the Company. The special
meeting of the stockholders of Enex will be held on August 20, 1998. The Company
intends to issue approximately 835,920 shares of common stock for the 20.8% of
Enex that the Company does not own.
On August 12, 1998 the Company received gross proceeds of approximately
$2,528,000 for various non-strategic properties that were auctioned by Oil & Gas
Asset Clearinghouse. The Company also sold certain other properties in private
sales in July and August for gross proceeds of $1,195,000. A portion of the
gross proceeds from these sales is being applied to the debt outstanding on the
$100 million Revolver.
17
<PAGE> 20
Item 2. Management's Discussion and Analysis or Plan of Operations.
Liquidity and Capital Resources
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Cash flow from operating activities for the current period of
$1,133,000 decreased $159,000 over the comparable period. The decrease in cash
flow was due primarily to higher G&G expenses and higher 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 $1,133,000 over the comparable period. Oil
and gas prices decreased 38% and 9%, respectively, while oil and gas production
increased 174% and 149%, respectively. The change in working capital increased
cash flow by $859,000 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 1.71 is greater
than the 1.25 required under the $100 million Revolver agreement. The Company
made $381,000 of required principal payments under the $100 million Revolver in
the current period. 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 higher than the comparable
period due primarily to the increased drilling activity. 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 $1,881,000 on the $100 million Revolver. No
monthly principal payments have been 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.
18
<PAGE> 21
The Company's operating activities provided net cash of $1,133,000 for
the current period. During this period, net cash from operations 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 $780,000 was spent on exploratory drilling. The principal
exploratory wells in the current period were the S. Highbaugh Prospect well
($199,000) and the Sherburne Prospect well ($350,000). Approximately $1,269,000
was spent on developmental drilling. 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 ($172,000) and a workover on a
well in the Abbeville Field ($122,000). Additional developmental drilling was
done in the Convis, Custer City, Spivey and Wellman 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 had current assets of $7,642,000 and current liabilities of
$7,241,000, which resulted in working capital of $401,000 as of June 30, 1998.
This was a decrease of $912,000 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. Current assets in the
current period include $1,741,000 of oil and gas properties that were sold at
auction on August 12, 1998. 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
2.33, calculated under the terms of the $100 million Revolver agreement, which
excludes stockholder receivables and debt due under the $100 million Revolver,
was in excess of the 0.90 to 1.00 required.
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 are expected to be plugged and abandoned in the third or
fourth quarter of 1998.
Minor Property Sale
On June 18, 1998 the Company entered into an agreement with Oil and Gas
Asset Clearinghouse to auction several hundred oil and gas properties owned by
the Company. The auction properties include properties acquired in the Enex and
Service Acquisitions. Certain non-strategic properties will be subject to
minimum bid. The majority of the properties will be sold by auction with no
minimum bids. 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.
19
<PAGE> 22
$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. 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 June 30, 1998 the Company had $30,589,000 outstanding under the $100
million Revolver and approximately $1,350,000 of outstanding letters of credit.
As of June 30, 1998, the Company is paying Libor plus 2.00% on a sixty day Libor
loan for $25,470,000 and a thirty day Libor loan for $4,500,000 and prime on
$619,000.
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.
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 of 0.9 to 1.00, determined on a quarterly
basis. The $100 million Revolver prohibits the payment of any cash dividend or
distribution or the purchase of any class of its capital stock.
20
<PAGE> 23
Series B Preferred Stock
In connection with the Shore Merger, 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 was junior to the Series A Preferred. For a period
of sixty-six 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 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 June 30, 1998, no additional shares of Series B have been issued.
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.
21
<PAGE> 24
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. Enex shares are traded on the
NASDAQ Stock Market National Market System under the symbol ENEX. 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.
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 June 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 six months ended June 30, 1998 and the years
ended 1997 and 1996 were approximately $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 June 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%).
22
<PAGE> 25
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 special meeting of the stockholders of
Enex will be held on August 20, 1998. The Company intends to issue approximately
835,920 shares of common stock for the 20.8% of Enex that the Company does not
own. The Company has also filed a preliminary registration statement on July 31,
1998, under the Securities Act of 1933 for the acquisition of the Enex
Partnership assets (the "Enex Partnership Acquisition") by the Company. The
Company intends to issue common stock to the minority limited partners for the
Enex Partnership Acquisition.
The operations of Enex and the Enex Partnership for the three months
ended June 30, 1998 were included in the financial statements of the Company.
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 $2,000,000 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.
At June 30, 1998, the principal outstanding under the $100 million
Revolver was approximately equal to the borrowing base. Under the terms of the
$100 million Revolver, the borrowing base declines $330,000 per month. Assuming
no changes in the outstanding letters of credit, the Company could be required
to make monthly principal payments of approximately $330,000 until the next
borrowing base redetermination on October 1, 1998.
Subsequent to determination of the current borrowing base, oil and gas
prices have declined. As the Bank's judgement about oil and gas prices impacts
borrowing base redeterminations, principal payments may increase or decrease
upon redetermination. Funds spent on debt retirement reduce the amount of cash
flow available to spend on acquisition, development and exploration activities.
The Company paid $1.5 million on the $100 million Revolver on April 10, 1998 and
paid an additional $330,000 in June, July and August and $51,000 in May in
accordance with the $100 million Revolver agreement.
23
<PAGE> 26
In the future, the Company expects to close Enex and the Enex
Partnership's headquarters at Kingwood and consolidate Enex and the Enex
Partnership's 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 August 6, 1998 two exploratory and three developmental wells were
being drilled.
Year 2000 Computer Issue
The Company's management has reviewed its exposure to the Year 2000 issue.
The Company will have its accounting software Year 2000 compliant by the end of
the third quarter. The Company's spreadsheet and word processing software is
Year 2000 compliant.
The Company has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts and other vendor
and/or service providers who utilize computers. The Company has not made
inquiries to all of the vendors and service/providers of its operated and
non-operated oil and gas properties. The Company has no control over Year 2000
compliance implementation by these parties.
24
<PAGE> 27
Results of Operations
Three months ended June 30, 1998 and 1997
For the current period, the revenues and expenses attributable to the
Enex Acquisition are included for the entire period and those attributable to
the Service Acquisition are included for the months of May and June. For the
prior period, the revenues and expenses attributable to the Bison Merger are
included for the entire period.
Total revenues for the current period of $4,808,000 were $2,957,000
higher than the comparable period. The increase in total revenues was due
principally to higher oil and gas revenues of $2,667,000. During the current
period the Company collected $197,000 in lease bonus and rental income on the
mineral acreage acquired in the Shore Merger.
The increase in oil and gas revenues consisted primarily of a
$1,022,000 increase in oil revenues and a $1,651,000 increase in gas revenues.
The increase in oil and gas revenues was the result of higher oil and gas
production. Production of oil increased 239% and production of gas increased
211%, over the comparable period. The oil production increase of 120,000 barrels
and the gas production increase of 787,000 Mcf, were due primarily to the Shore
Merger 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 171,000 barrels of oil and 1,160,000 Mcf of gas, as compared to
50,000 barrels and 373,000 Mcf for the comparable period. The average price
received on the gas sold in the current period of $2.07 per Mcf was 3% higher
than the $2.01 per Mcf received in the comparable period. The average price
received on the oil sold in 1998 of $11.34 per barrel was 38% lower than the
$18.16 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.
Total expenses increased $3,892,000 over the comparable period. Due to
the growth of the Company over the last twelve months, all categories of
expenses increased except G&G costs and dryhole costs.
Lease operating expenses increased $1,743,000. The increase was due
principally to the additional expenses on the properties acquired in the Shore
Merger which closed in 1997 and the Enex and Service Acquisitions which closed
in 1998.
Geological and geophysical expenses ("G&G expenses") decreased by
$69,000. In the current period, the Company spent approximately $42,000 in G&G
expenses on the Hawkins Ranch Prospect versus $111,000 spent on the Reflection
Ridge Prospect in the comparable period.
Depletion and depreciation expense increased $1,331,000. Depletion was
higher due to depletion on properties acquired in the Shore Merger and the
Riceville Acquisition, which closed in 1997, and the Enex and Service
Acquisitions, which closed in 1998.
25
<PAGE> 28
During the current period, dryhole expenses decreased by $215,000,
resulting in a credit of $162,000. The reason for the credit was additional
revisions on the Middle Bay Oil #1 amounting to $166,000.
Interest expense increased $433,000, due primarily to a higher loan
balance.
Stock compensation expense increased $33,700 due to the vesting of the
restricted stock granted to certain Company employees in February 1997.
General and administrative expenses ("G&A") increased $635,000. The
increase in G&A consists primarily of a $227,000 increase in salaries and
increases of $71,000 in rent, $62,000 in office expense, $38,000 increase in
contract labor and $77,000 in engineering and legal expenses. The increase in
salary expense was due to increases in salaries of existing employees, salaries
of new employees and salaries associated with employees added in the Bison and
Shore Mergers. For the current period, the Company had twenty full-time
executive and clerical employees. Eight employees were added through the Bison
and Shore mergers and the Company hired six 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
$1,159,000 for the current period versus an operating loss of $223,000 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 reduced the operating loss by $149,000.
The Company reported a deferred income tax benefit of $344,000 in the
current period. No deferred taxes were recorded in the comparable period.
The Company reported a net loss of $666,000 for the current period
versus a net loss of $223,000 for the comparable period. After considering the
preferred stock dividend requirement of $141,000 in the comparable period, the
Company reported a net loss available to common stockholders in the current and
comparable periods of $666,000 and $365,000, respectively.
Six months ended June 30, 1998 and 1997
For the current period, the revenues and expenses attributable to the
Enex Acquisition are included for the period April through June those
attributable to the Service Acquisition are included for the months of May and
June. For the prior period, the revenues and expenses attributable to the Bison
Merger are included for the period March through June.
Total revenues for the current period of $7,565,000 were $3,812,000
higher than the comparable period. The increase in total revenues was due
principally to higher oil and gas revenues of $3,423,000. During the current
period the Company collected $197,000 in lease bonus and rental income on the
mineral acreage acquired in the Shore Merger. Other revenues in the current
period increased $187,000.
26
<PAGE> 29
The increase in oil and gas revenues consisted primarily of a
$1,342,000 increase in oil revenues and a $2,001,000 increase in gas revenues.
The increase in oil and gas revenues was the result of higher oil and gas
production. Production of oil increased 174% and production of gas increased
149%, over the comparable period. The oil production increase of 168,000 barrels
and the gas production increase of 1,006,000 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 264,000 barrels of oil and 1,681,000 Mcf of gas, as
compared to 97,000 barrels and 676,000 Mcf for the comparable period. The
average price received on the gas sold in the current period of $2.13 per Mcf
was 9% lower than the $2.35 per Mcf received in the comparable period. The
average price received on the oil sold in 1998 of $12.26 per barrel was 38%
lower than the $19.64 per barrel received in the comparable period. A
reclassification of 12,000 barrels and $176,000 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.
Total expenses increased $6,930,000 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 $2,288,000. 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.
Geological and geophysical expenses ("G&G expenses") increased by
$673,000. In the current period, the Company spent approximately $740,000 in G&G
expenses on the Hawkins Ranch Prospect versus approximately $111,000 on the
Reflection Ridge Prospect in the comparable period.
Depletion and depreciation expense increased $1,970,000. 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.
During the current period, dryhole expenses increased by $72,000. In
the current period the dryhole expense of $307,000 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. The net
dryhole expense on the Middle Bay Oil #1 for the current period was a credit of
$36,000 because of the actual dryhole cost being less than the estimated dryhole
cost. The Reflection Ridge wells and the Middle Bay Oil Co. #1 were drilled and
abandoned in the fourth quarter of 1997. Dryhole expenses in the comparable
period consisted principally of costs through the Brigham Agreement.
Interest expense increased $553,000, due primarily to a higher loan
balance.
Stock compensation expense increased $67,000 due to the vesting of the
restricted stock granted to certain Company employees in February 1997.
27
<PAGE> 30
General and administrative expenses ("G&A") increased $1,306,000. The
increase in G&A consists primarily of a $393,000 increase in salaries, $132,000
in performance bonuses for the previous year and an increase of $305,000 in
engineering, accounting and legal expenses and an increase in rent expense of
$89,000 and office expense of $99,000. The increase in salary expense was due to
increases in salaries of existing employees, salaries of new employees and
salaries associated with employees added in the Bison and Shore Mergers. For the
current period, the Company had twenty full-time executive and clerical
employees. Eight employees were added through the Bison and Shore mergers and
the Company hired six 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
$3,301,000 for current period versus an operating loss of $183,000 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 reduced the operating loss by $149,000.
The Company reported a deferred income tax benefit of $1,072,000 in the
current period. No deferred taxes were recorded in the comparable period.
The Company reported a net loss of $2,081,000 for the current period
versus a net loss of $183,000 for the comparable period. After considering the
preferred stock dividend requirement of $68,000 in the current period versus
$204,000 in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $2,149,000 and
$387,000, respectively.
28
<PAGE> 31
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 1998 a proxy was mailed to shareholders of record on April
10, 1998 soliciting their vote at the Annual Meeting of Shareholders of the
Company on June 18, 1998. The following matters were submitted to a vote of
shareholders (Shares Eligible to Vote on All Matters: 7,830,766):
1. Election of Directors
Messrs. Edward P. Turner, Jr., John J. Bassett, Frank E. Bolling, Jr.,
C.J. Lett, III, Stephen W. Herod, Alvin V. Shoemaker and Gary R.
Christopher were elected to serve on the Board of Directors until the
next Annual Meeting of Shareholders.
For Without Authority
All Nominees 7,158,472 567
2. Amendment to increase the authorized capital stock of the Company from
10,000,000 to 20,000,000 shares of common stock and from 5,000,000 to
10,000,000 shares preferred stock.
The increase in the authorized capital stock of the Company to
20,000,000 common shares and 10,000,000 preferred shares was approved.
For Against Abstain
6,583,466 11,911 --
3. Amendment to increase to 1,500,000 shares the number of shares of
common stock available to option under the 1995 Stock Option and Stock
Appreciation Rights Plan.
The increase in the number of shares under the 1995 Stock Option and
Stock Appreciation Rights Plan to 1,500,000 common shares was approved.
For Against Abstain
6,579,089 16,186 102
4. Ratification of Auditors
KPMG Peat Marwick, LLP was approved as the Company's independent
accountants for 1998 and 1999.
For Against Abstain
7,157,988 1,015 --
29
<PAGE> 32
Item 6. Exhibits and Reports on Form 8-K
(a) 27 - Financial Data Schedule (for SEC use only).
(b) On May 4, 1998, the Company filed a report on Form 8-K under Item 2
and Item 7 describing the Company's Assets Purchase Agreement with Service
Drilling Co., LLC whereby the Company would acquire substantially all of the oil
and gas assets of Service Drilling Co., LLC.
On May 6, 1998, the Company filed a report on Form 8-K under Item 2
describing the Company's acquisition of 1,064,032 shares of the common stock of
Enex Resources Corporation.
On May 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 2 describing the
Company's Assets Purchase Agreement with Service Drilling Co., LLC whereby the
Company would acquire substantially all of the oil and gas assets of Service
Drilling Co., LLC
On June 10, 1998, the Company filed a report on Form 8-K/A, as an
amendment to the original 8-K filed May 6, 1998, under Item 7 providing the
financial statements, pro forma information and exhibits describing the
Company's acquisition of 1,064,032 shares of the common stock of Enex Resources
Corporation.
30
<PAGE> 33
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: August 14, 1998 By: /s/ Frank C. Turner II
-----------------------
Frank C. Turner II
Vice-President and
Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS - BALANCE SHEETS AT JUNE 30, 1998 (UNAUDITED) AND THE
STATEMENTS OF OPERATIONS AT JUNE 30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,061,612
<SECURITIES> 0
<RECEIVABLES> 3,193,811
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,641,959
<PP&E> 92,635,894
<DEPRECIATION> (32,404,946)
<TOTAL-ASSETS> 68,242,662
<CURRENT-LIABILITIES> 7,240,951
<BONDS> 26,628,604
0
3,627,000
<COMMON> 171,047
<OTHER-SE> 38,272,126
<TOTAL-LIABILITY-AND-EQUITY> 68,242,662
<SALES> 7,116,918
<TOTAL-REVENUES> 7,564,994
<CGS> 3,605,015
<TOTAL-COSTS> 3,605,015
<OTHER-EXPENSES> 6,448,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812,841
<INCOME-PRETAX> (3,301,236)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,148,628)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
